Oil falls as fuel supplies jump

Oil prices remained depressed in a shortened trading session Wednesday after the government reported an unexpected decline in crude inventories, but a big increase in supplies of refined fuels.

U.S. crude for February delivery fell $1.30 to $37.68 a barrel from the previous day's close of $38.98. Prices had been down $1.60 just before the report's release. Oil trading closes at 1 p.m. ET because of the holiday.

A buildup in supplies of gasoline and distillates points to falling demand as cash-strapped consumers and businesses cut back on spending.

"The economic slowdown is just doing a lot more than people thought," said James Cordier, founder of commodities brokerage OptionSellers.com.

Consumer spending slowed in November for the fifth month in a row, and jobless claims reached a 26-year high last week, according to government reports.

Supplies: The Energy Department said Wednesday that supplies of crude oil fell by 3.1 million barrels for the week ended Dec. 19.

Analysts had expected crude supplies to rise by 1.5 million barrels last week, according a survey by information firm Platts.

However, the government also said that fuel supplies had risen more than expected. Supplies of motor gasoline rose by 3.3 million barrels, and stocks of distillates, which are used to make diesel fuel and home heating oil, rose by 1.8 million, according to the report.

Investors were expecting a 900,000-barrel increase in gasoline supplies, and a 1.4 million barrel increase in supplies of distillates, according to the Platts survey.

The large build up in gasoline and distillate supplies indicates that demand continues to deteriorate. "There's just no reason for refineries to chase oil, as we have much more than we need," Cordier said.

Crude prices may continue to fall and could go as low as $35 a barrel unless the economy starts to turn around, he added.