Updated from 1:57 p.m. EDT

Oil prices tanked again Wednesday after a government report showed strong gains in crude and gasoline inventories last week.

Light, sweet crude for May delivery, which has fallen more than 7% this month, closed down $1.64 to $50.22 a barrel in Nymex floor trading. Unleaded gasoline futures fell more than 5 cents to $1.48 a gallon.

The Energy Department says crude stocks rose by 3.6 million barrels last week -- their ninth straight weekly gain -- while gasoline stocks rose by 800,000 barrels. Analysts had been expecting a 300,000-barrel gain in crude stocks and flat gasoline inventories.

With the peak summer driving season coming up, the market's focus is on gasoline supplies. Analysts have recently expressed concern about refining capacity not meeting motorists' demand, but recent data showing an increase in U.S. refinery output coupled with growing gasoline inventories appear to be turning the argument in favor of the bears.

"Spring is normally the time when there are higher stock builds. This is a seasonal trend rather than a long-term, structural one," says Peter Zeihan, energy analyst as Stratfor, a private consulting group. Come summer, Zeihan expects inventory to remain tight as demand from both the U.S. and China stays brisk. "Oil prices will remain high because of demand, and gasoline will stay around the $2 per gallon level for a while," he says.

On Tuesday, oil prices fell almost $2 a barrel after the International Energy Agency lowered its forecast for worldwide oil consumption, highlighting a decrease in Chinese demand.

Traders are also keeping an eye on OPEC, which is considering another increase to its official output quota. The cartel is close to approving a 500,000-barrel-a-day increase, having agreed to one of the same size in mid-March.

An International Energy Agency monthly report says that OPEC's production quotas for March were 29.1 million barrels per day. OPEC's maximum pumping capacity is said to be 32 million barrels a day. World oil consumption in the first quarter averaged 84.6 million barrels a day, the IEA says. It is expected to drop to 82.7 million in the second quarter before rising again to 86.1 million barrels a day by year-end.

Further on the international scene, Venezuela, the world's fifth-largest oil producer, is said to be in negotiations to sell oil to Spain, the

AP

reported. Venezuela currently exports most of its oil to the U.S. but says that any deal with Spain would not affect oil supplies already committed to the U.S.

In company news, Prudential analyst Jason Gammel raised his full-year earnings estimates for

Chesapeake Energy

(CHK) - Get Report

by 7 cents a share to $2.04. He also raised his 2006 earnings estimate by 5 cents a share to $2.10.

Chesapeake is buying oil- and gas-producing assets in southern and eastern Texas, a deal which is viewed by Gammel as "very attractive," and will lead to "incremental production as well as incremental natural gas and oil price hedges," the analyst says in a report.

Murphy Oil

(MUR) - Get Report

forecast first-quarter earnings of $1.10 to $1.15 a share Wednesday, below the Wall Street consensus of $1.34 a share. It cited weak retail gasoline margins, among other things. Shares dropped $2.92, or 2.99%, to $94.78.

Retail gasoline margins represent the difference between the cost of a barrel of crude and the prices the company charges for gasoline, or the refined product, at the pump. Gary Hovis, analyst at Argus Research, says that Murphy is competing with the bigger integrated oil and gas companies such as

Exxon Mobil

(XOM) - Get Report

, which can more easily digest the costs of refining and marketing, than the independent companies.

Higher crude prices are shrinking gasoline profit margins at all gas and oil companies, Hovis says, but those with strong exploration and production operations are still making out well. Murphy Oil, which also produces its own crude, will continue increasing its earnings at an annual average rate of 9%, Hovis believes. Earnings in 2004 were $5.31, and he expects them to rise in 2005 to $5.50 per share.

A drilling success for

Spinnaker Exploration

( SKE) sent its shares up more that 7% Wednesday. The company reported a discovery in the Mississippi Canyon, where it owns a 25% working interest. The Thunder Hawk discovery well is being drilled in 5,716 feet of water and has reached a depth of 23,765 feet. Shares jumped $1.36, or 4.02%, to $35.16.

Shares of major oil producers were mostly down as oil prices fell. Exxon Mobil dropped 9 cents, or 0.15%, to $60:34;

ChevronTexaco

(CVX) - Get Report

fell 92 cents, or 1.52%, to $59.91;

Royal Dutch/Shell

( RD) dropped 50 cents, or 0.82%, to $60.22;

BP

(BP) - Get Report

dropped $1.32, or 2.14% to $61.30; and

ConocoPhillips

(COP) - Get Report

fell $2.13, or 1.97%, to $106.15.