Updated from 1:24 p.m. EDT

Oil prices dropped Wednesday after the U.S. government reported solid gains in both crude and distillate-fuel inventories for last week.

The August contract, which plunged more than $2 Tuesday, settled down another 94 cents to $57.26 a barrel on Nymex. Gasoline futures, which dropped 4 cents to $1.58 a gallon, have fallen more than 5% in the last two sessions.

The Energy Department said in its weekly inventory report that crude stocks rose by a surprising 1.1 million barrels; analysts expected a 1.4-million-barrel drop. Distillates, a group that includes diesel, heating oil and jet fuel, rose by 1.7 million barrels, roughly in line with expectations. Gasoline inventories rose by 300,000 barrels.

Refineries operated at 96.3% utilization last week yielding 9.1 million gasoline barrels a day -- the second highest weekly average ever.

Distillate demand growth declined from the prior week, but is still relatively robust, at 5.7% higher than a year ago. Jet fuel demand was 3.3% higher than the same time last year.

"Supplies of both crude and gasoline are at very comfortable levels," says Jeff Mokychic, futures analyst at Bridgeton Global Investor Services. "Lower distillates were not enough of a concern to justify $60 oil."

Still, says Mokychic, "another run to $60 is not impossible."

Oil prices hit an all-time record high above $60 a barrel earlier this week, climbing about 35% since January. The rally stalled Tuesday when speculators began to take profits ahead of the quarter's end.

"We probably saw a peak over $61 a barrel and I expect a correction to $55," says David Jesser, branch manager at the trading firm Alaron.com. "But it's still a bull market."

At Banc of America, analysts warn investors from thinking that the rally is over. "Don't look down," analyst Dan Barcelo said in a research note. "Demand is holding in, and there are limited signs of a supply response. Until supply and spare capacity catch up with demand, we expect oil prices to trend well above mid-cycle conditions."

Barcelo upped his 2005 oil price estimate to $54 a barrel, from $50. He also raised both


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to buy from neutral.

At the same firm, analyst Anatol Feygin raised the natural gas 2005 price estimate to $7 per thousand cubic feet and increased price targets for nine commodity sensitive stocks, notably



, with a 7% upward price-target adjustment to $36.50.

Elsewhere, shares of

Southwestern Energy

(SWN) - Get Report

jumped more than 6% Wednesday after the Arkansas Oil and Gas Commission approved two new fields for drilling in the Fayetteville Shale play. The area is about 13 square miles, in which about 300 wells can be drilled with an expected ultimate recovery of 300,000 to 480,000 thousand cubic feet per well.

Despite the news, Raymond James said the company might be overvalued. "While we acknowledge that Southwestern has achieved some early success in its Fayetteville Shale play, we believe the market has already accounted SWN shares substantial value for this asset," it said in a note.

Shares of



leaped for the second day after the Calgary, Canada-based oil and gas exploration company said Tuesday it discovered natural gas off the east coast of India, in a project operated by Gujarat State Petroleum Corporation, in which it has a 5% working interest.

The gas was discovered during the initial test drills, while the company said additional "testing and technical evaluation must be completed, and more exploratory wells must be drilled in order to establish the extent of the field and to estimate the natural gas reserves discovered." Shares doubled Tuesday and tacked on another 28% Wednesday to $8.90.

Among the major producers, shares were mixed.

Exxon Mobil

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fell 1.22%, Chevron dropped 0.39%,


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declined 0.28%, and BP dropped 1.41%.