Updated from 1:40 p.m.

Oil prices declined Wednesday after an Energy Department report suggested that recente pressure on crude inventories is waning.

August crude, which rose above $58 a barrel earlier, closed down 74 cents to $56.72 on Nymex. Gasoline futures held at $1.67 a gallon.

The Energy Department said in its weekly inventory report that crude stocks fell by 900,000 barrels in the week ended July 15, well below the 3.7 million-barrel drop estimated by analysts. Gasoline inventories fell by 1.3 million barrels while distillates, specifically heating oil, increased by 2.3 million barrels, roughly in line with expectations.

Crude prices fell below a five-day trading range of $57 to $59 a barrel. Five hurricanes, which helped escalate prices to an all-time high above $62 a barrel earlier this month, have mostly spared the oil supply chain, soothing concerns and prices.

As the second half of the year kicks off, it has become more apparent that global oil supply will probably be enough to meet demand, which is expected to average around 83.7 million barrels a day. Products supply, however, is still a source of concern as a global shortage in refining capacity could fail to meet a fourth-quarter upsurge in winter heating oil use.

Mary Novak, managing director of energy services at Global Insight, estimates oil prices will remain in a range of $55 to $60 a barrel for the next two years, saying that not enough money is being spent to expand refining capacity.

"There is no rush to the market. Producers are waiting for clues on the demand direction before they make expensive investment," Novak said. She estimates oil prices will begin a gradual erosion toward the mid-$40s in 2007 as demand growth continues and incremental supply is added.

In economic news from China, the National Bureau of Statistics said Wednesday that the country's gross domestic product grew by 9.5% in the first half of 2005, more than expected, and that domestic retail fuel sales jumped by 37% in the same time period,

Bloomberg

reported.

Both growth figures point at a strong economic activity in the world's second biggest oil consumer. The news contrasts with analyst estimates last week that suggested the rate of consumption growth in China is falling.

Wenchao Su, oil analyst at ESAI who specializes in China, said that the increase in fuel sales probably doesn't represent more buying of fuel, but rather higher fuel prices. The Chinese government, which has price caps on retail fuels, raised gasoline and diesel prices twice over the past six months, Su said.

In company merger news Wednesday,

Chevron

(CVX) - Get Report

has upped its previous bid to buy

Unocal

( UCL) by $2 a share, countering an offer from China's

Cnooc

(CEO) - Get Report

. Unocal said Wednesday its board accepted Chevron's amended offer and encourages stockholders to approve the deal on Aug. 10. The $17 billion proposal is structured as 40% cash and 60% stock, compared with Cnooc's all-cash $18.5 million bid.

Elsewhere,

Lufkin Industries

( LUFK), which provides equipment and service to the gas and oil industry, said its second quarter earnings almost tripled to 71 cents a share, driven by a "strong energy market" and increased pricing power. Analysts on average expected earnings of 68 cents a share, according to Thomson Financial. The shares rose $1.20, or 2.75%, to $44.84.

Energy Partners

(EPL)

provided a second quarter production update Wednesday, stating that out of seven exploratory wells that it recently completed drilling, three were dry holes. According to Raymond James, the company logged a 74% offshore drilling success rate this year, and a 69% success rate onshore. Shares fell 73 cents, or 2.7%, to $26.41.

Shares of the major oil producers were mostly down Tuesday.

ExxonMobil

(XOM) - Get Report

fell 0.1%, Chevron rose 0.2%,

ConocoPhillips

(COP) - Get Report

lost 0.1%,

Royal Dutch/Shell

( RD), which started trading Wednesday as a single stock after the British and Dutch companies completed their official merger, dropped 0.5%, and

BP

(BP) - Get Report

declined 0.9%.