Updated from 2:28 p.m. EDT

Oil eased again Tuesday as traders shortened up ahead of what is expected to be a bearish report on crude and gasoline inventories tomorrow.

July crude settled down 73 cents to $53.76 a barrel on Nymex. Gasoline futures fell 2 cents to $1.51 a gallon, and heating oil was little changed at $1.61 a gallon.

Analysts and traders eyed Wednesday's Energy Department report for evidence on whether last week's distillate frenzy was overblown. An unexpected runup in products such as heating and diesel oil last week underpinned a rally in the crude market.

Last week's inventory report showed that distillate levels were below the average for this season, prompting panicked short-sellers to cover positions. Crude rose 5% despite a significant rise in inventories.

This week's report is estimated to show another 300,000-barrel build in crude oil and a 1-million-barrel rise in distillates levels.

OPEC's President Sheikh Ahmad al-Fahd al-Sabah said on Tuesday the cartel would probably raise production when it meets in Vienna on June 15 in order to rein in prices,

Reuters

said. "If the price will continue as it is now I will propose as president to increase by 500,000 (barrels per day) for the ceiling," Sheikh Ahmad al-Fahd al-Sabah said.

The cartel openly admits it has been producing well in excess of its formal quotas for some time now, about 30 million barrels a day. A 500,000-barrel production increase would probably have only a subdued affect on the market, analysts say, as full tilt production is already reflected in oil prices.

In corporate merger news, Chinese oil producer

CNOOC

(CEO) - Get Report

said Tuesday that it is still considering bidding for

Unocal

(UCL)

,

Reuters

reported.

After

Chevron

(CVX) - Get Report

struck a deal in April to buy Unocal for $16.4 billion, CNOOC has returned to the table. The company said in a statement to the Hong Kong Stock Exchange that it was "continuing to examine its options with respect to Unocal. These options include a possible offer by the company for Unocal, but no decision has been made in this respect,"

Reuters

said.

Elsewhere,

Weatherford International

(WFT) - Get Report

, the drilling equipment provider, was raised to buy from neutral by Merrill Lynch based on its acquisition of two divisions from

Precision Drilling Services

(PDS) - Get Report

Monday. "We believe the transaction is an attractive strategic fit and it is expected to be very accretive to WFT's future earnings," Merrill's analyst Mark Urness said in a note. He also raised the company's 2005 earnings estimate from $2.55 to $2.60 and the 2006 estimate from $3.15 to $3.55. Shares increased $1.47, or 2.72%, to $55.47.

Other companies in the oil equipment and services sector were trading higher Tuesday, with

Lufkin Industries

(LUFK)

up 4.2% to $32.05, and

Willbros Group

(WG)

trading 5.9% higher at $13.45.

Shares of

Energen

(EGN)

also climbed after the gas and oil company said Monday night that it has hedged 5 billion cubic feet of its 2006 natural gas production at $7.50 per thousand cubic feet, and 360,000 barrels of its 2006 sour oil production for an equivalent price of $55.21 a barrel. Natural gas was recently trading at $7.09 per thousand cubic feet. The company's total natural gas hedge position for 2006 now stands at approximately 22.7 billion cubic feet at an average price of $6.99.

Following its hedging activity Energen raised its 2006 earnings guidance to a range of $2.55 to $2.75 per share, up from a range of $2.50 to $2.60. Shares swelled $1.05, or 3.26%, to $33.30.

Bank of America raised Energen's 2006 earnings estimate to $2.73 and its target price to $34 from $33.50 following the hedging news.

Shares of the major oil producers were mixed.

Exxon Mobil

(XOM) - Get Report

rose 0.61%;

Chevron

(CVX) - Get Report

gained 0.73%;

ConocoPhillips

(COP) - Get Report

fell 0.16%;

Royal Dutch/Shell

(RD)

rose 0.81%; and

BP

(BP) - Get Report

increased 0.70%.