July 16 (Bloomberg) -- Crude oil futures fell more than $4 a barrel in New York after a surprise increase in U.S. inventories and as a slowing U.S. economy sapped demand for energy.

Supplies rose 2.95 million barrels to 296.9 million barrels last week, an Energy Department report showed. Stockpiles were forecast to drop 2.2 million barrels, according to a Bloomberg survey. Fuel demand averaged 20.3 million barrels a day in the past four weeks, down 2 percent from 2007, the department said.

``The inventory numbers are starting to reflect the bad macro-economic news,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``Not only did we get a surprise build in crude-oil stocks, the products were also up nicely.''

Crude oil for August delivery fell $4.14, or 3 percent, to settle at $134.60 a barrel at 3 p.m. on the New York Mercantile Exchange. Prices dropped 7.3 percent since July 14, the biggest two-day decline since January 2007. Futures are up 81 percent from a year ago.

Oil today fell as low as $132 a barrel, more than 10 percent below the record of $147.27 reached on July 11. A drop of that magnitude is commonly referred to as a correction.

``Between the bearish DOE numbers and the price drop of the last two days it may be time to back up and re-evaluate whether the market is still bullish or now bearish,'' said Tim Evans, an energy analyst for Citi Futures Perspective in New York. ``It's still unclear whether the funds will use this drop to buy futures or bail out.''

Gasoline Supplies

Gasoline stockpiles rose 2.47 million barrels to 214.2 million barrels, the report showed. An 800,000 barrel decline was forecast. Inventories of distillate fuel, including heating oil and diesel, gained 3.19 million barrels to 125.7 million, the department said. A 2 million barrel increase was forecast.

Gasoline for August delivery fell 10.54 cents, or 3.1 percent, to settle at $3.2794 a gallon in New York. Futures reached $3.631 a gallon on July 11, an all-time high.

Consumption of gasoline averaged 9.3 million barrels a day over the past four weeks, down 2.1 percent from the same period last year, the Energy Department supply report showed.

``I don't see anything bullish is this report,'' said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``There were higher inventories across the board in the face of weak product demand.''

Imports Climb

Imports rose 13 percent to 10.8 million barrels a day in the week ended July 11, the highest since August, the report showed.

``We will have to see if this is a one-week blip or a sustained gain in supplies and imports,'' Mueller said. ``The strong import number may be a sign that the Saudis are both producing more and pricing it to move so refiners will take additional volumes.''

Saudi Arabia increased oil output by 280,000 barrels a day in June to 9.53 million barrels, the highest since March 2006, according to a Bloomberg News survey. In response to calls from consuming nations, the kingdom said it would produce an extra 300,000 barrels a day in June and another 200,000 barrels a day in July to curb prices.

Crude oil also fell because of the dollar's rise against the euro today, which reduced the appeal of commodities as an inflation hedge. The U.S. currency increased 0.6 percent to $1.5814 per euro at 3:07 p.m. in New York, from $1.5911 yesterday, when it declined to a record low of $1.6038.

Yesterday's 4.4 percent drop in New York crude oil futures was the largest since March, as Federal Reserve Chairman Ben S. Bernanke said that risks to U.S. economic expansion and inflation have risen.

`Enormous Jumps'

``The enormous jumps in oil prices and other commodity prices are, to some extent, due to real factors out of the control of the Federal Reserve,'' Bernanke said before the House Financial Services Committee today. ``The Federal Reserve cannot create another barrel of oil, it's the global supply and demand.''

Prices paid by U.S. consumers jumped 1.1 percent in June after a 0.6 percent gain the prior month, the Labor Department said today in Washington.

Plans by a high-ranking American diplomat to take part in nuclear negotiations with Iran have tempered speculation that the U.S. or Israel may attack OPEC's second-biggest oil producer in a dispute over its nuclear plans. Concern about a possible strike helped push oil prices to a record last week.

Undersecretary of State William Burns will participate in the European Union-Iran talks this weekend in Geneva, State Department spokesman Sean McCormack said today without giving details. This is a shift in the U.S. position on talks with a government it has shunned since 1980.

Chevron Corp. resumed contracted deliveries of crude oil produced onshore Nigeria, which were stopped following a militant attack on a pipeline last month.

Brent crude oil for August settlement declined $2.56, or 1.9 percent, to settle at $136.19 a barrel on London's ICE Futures Europe exchange. Prices climbed to a record $147.50 on July 11.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

Last Updated: July 16, 2008 15:29 EDT