May 15 (Bloomberg) -- Crude oil fell for a second day in New York as an Energy Department report showed U.S. supplies of distillate fuels, including diesel, rose more than forecast.

Stockpiles of distillates gained 1.34 million barrels last week, the report showed. Supplies were expected to climb 1 million barrels, according to the median of forecasts in a Bloomberg News survey. U.S. fuel consumption dropped last week, the department said.

``The market was not as bullish before and when the distillates showed a strong build the market zeroed on that and some people took profits,'' said Victor Shum, senior principal at consultants Purvin & Gertz Inc. in Singapore.

Crude oil for June delivery fell as much as 68 cents, or 0.6 percent, to $123.54 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $123.87 a barrel at 12:01 p.m. Singapore time. Yesterday, oil fell $1.58, or 1.3 percent, to settle at $124.22 a barrel.

That was the first time in eight days that oil didn't reach a record. The contract surged to an all-time high of $126.98 on May 13. Prices are 96 percent higher than a year ago.

Total implied U.S. fuel demand dropped 2.7 percent from a year earlier to 20.3 million barrels a day last week, the report showed. Consumption averaged 20.5 million barrels a day in the past four weeks, down 0.3 percent from a year earlier.

``We saw a reasonably positive sign for stockpiles,'' said Gerard Burg, an energy and minerals economist at National Australia Bank Ltd. in Melbourne. ``Since we've seen these high prices sustained for the last couple of years, we're starting to see people make choices in the marketplace.''

Refinery Capacity

Brent crude oil for June settlement declined as much as 67 cents, or 0.6 percent, to $121.19 a barrel on London's ICE Futures Europe exchange. It was at $121.60 at 12:02 p.m. Singapore time. Yesterday, it fell $2.24, or 1.8 percent, to settle at $121.86 a barrel. The contract touched a record $125.90 on May 9.

Heating oil for June delivery was at $3.6128 a gallon, down 0.5 cent, at 12:05 p.m. in Singapore. Yesterday, it declined 8.11 cents, or 2.2 percent, to settle at $3.6178 a gallon. Futures had jumped to $3.7228 a gallon, the highest since trading began in 1978. Some traders use heating-oil futures to hedge their diesel and jet-fuel purchases.

U.S. refineries operated at 86.6 percent of their capacity last week, up 1.6 percentage points from the week before, the highest since the week ended Jan. 11, the department said. Analysts had forecast a 0.7 percentage point increase.

Crude Inventories

Oil supplies rose 176,000 barrels to 325.8 million barrels, the report showed. A 2.25 million-barrel increase was forecast, according the median of responses by 14 analysts surveyed by Bloomberg News. The gain left inventories 0.8 percent above the five-year average for the week, the department said.

The Energy Department released its weekly report on inventories yesterday in Washington.

OPEC will have to cut output of lower-quality grades because of weak demand, Iran's OPEC governor said yesterday.

``If OPEC isn't cutting production officially, they will do it in secret because the price is so high'' and supply cuts wouldn't be popular with consuming nations, Hossein Kazempour Ardebili said in a phone interview from Tehran. ``Cuts will start on a voluntary basis, and will have to become formalized once secondary sources make the numbers clear.''

Iran is holding 20 million barrels of crude oil on tankers, about five days of production, people familiar with the situation said last week. Iran's oil includes some of the heaviest and most sulfurous grades sold, making them less desired by refiners.

``They might cut back some production but they would probably do it quietly,'' said Purvin & Gertz's Shum. ``It would be politically unacceptable to be cutting output when pricing is still above $120.''

To contact the reporter on this story: Christian Schmollinger in Singapore at Christian.s@bloomberg.net.

Last Updated: May 15, 2008 00:10 EDT