Benchmark crude for April delivery was down 81 cents at $104.21 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract fell 42 cents to settle at $105.02 on Tuesday.
In London, Brent crude was down 27 cents at $112.59 a barrel on the ICE futures exchange.
The American Petroleum Institute said late Tuesday that crude inventories rose 3.8 million barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had forecast an increase of 2.3 million barrels. However, inventories of gasoline fell 3.7 million barrels and distillates fell 1.5 million barrels, the API said.
The Energy Department's Energy Information Administration reports its weekly supply data later Wednesday.
Investors are closely watching oil output from Libya, where fighting has raged for weeks between forces loyal to Moammar Gadhafi and rebels, who have take control of most of the eastern part of the OPEC nation.
So far, most of Libya's 1.6 million barrels per day of crude production has shut down, the biggest disruption to oil exports since a wave of political upheaval this year toppled governments in Tunisia and Egypt and sparked violent protests in Algeria, Morocco, Yemen, Oman, Bahrain and Iran.
Traders are especially concerned unrest could spread to Saudi Arabia, the world's largest crude exporter. Bank of America Merrill Lynch raised its 2011 oil price forecast to $101 from $87 and expects Brent crude to average $122 in the second quarter.
"With so many open fronts, additional oil disruptions can not be ruled out due to contagion risk," Bank of America Merrill Lynch said in a report. "For example, unrest in Bahrain is likely to increase the risk of social unrest spreading into Saudi Arabia or Iran."
"Our base case assumes Libya will stay mostly offline for 6 months, limited oil infrastructure damage, no further oil supply disruptions in the region and modest global demand destruction."
In other Nymex trading for April contracts, heating oil was down 0.8 cent at $3 a gallon and gasoline fell 0.3 cent to $2.94 a gallon. Natural gas was up 1.8 cents at $3.88 per 1,000 cubic feet.
