Oil prices fall sharply on reports of higher oil, fuel stockpiles

NEW YORK -- Oil futures fell sharply Wednesday after the Energy Department said the United States' stockpiles of fuel and oil were larger than expected last week -- evidence that the soaring price for gasoline has sliced into Americans' demand for fuel.

Light, sweet crude for August delivery fell $3.81 to $133.19 on the New York Mercantile Exchange.

In its weekly inventory report, the department's Energy Information Administration said crude oil stocks rose slightly last week. Analysts surveyed by research firm Platts had expected a 1.7 million barrel decline.

Gasoline supplies fell less than expected. And inventories of distillates -- which include diesel fuel and heating oil -- rose much more than expected.

Demand for gas, meanwhile, fell 2.1 percent.

The weekly inventory report tends to trigger volatile trading in oil futures, especially since prices have risen to record levels near $140.

Energy investors are awaiting this afternoon's Federal Reserve decision on interest rates and, perhaps more importantly, the central bank's take on where the economy is headed. Interest rates affect the dollar, and the Fed's campaign of rate cuts, which began in September, has sent the greenback on a protracted decline against the euro. Many analysts believe this decline is a big part of the reason oil prices have nearly doubled over the past year.

Many investors buy commodities such as oil as a hedge against inflation when the dollar weakens. Also, a weaker dollar makes oil cheaper to investors dealing in other currencies, such as the euro. If the Fed holds rates steady, and indicates that it may even raise rates in the future, energy investors may sell oil futures on the belief that the dollar will strengthen.