) -- Oil prices settled below $80 a barrel on Wednesday after a government report revealed a large buildup in crude and product inventories that surpassed expectations.

The Energy Information Administration said crude stockpiles swelled by 3.7 million barrels to 331 million barrels for the week ended Jan. 8. A survey by Platts forecast a 1.9 million-barrel increase for last week.

The February delivery contract for crude oil fell to a low of $78.37 a barrel following the report before settling down by $1.14, or 1.4% at $79.65.

Even more telling, the report went on to show a bearish build in crude products. Gasoline inventories rose by 3.8 million barrels, though analysts called for a smaller build of 1.6 million barrels. Distillate fuel stockpiles, which include heating oil, were thought to have fallen by 1.7 million barrels because of recent frigid temperatures. Instead they did the opposite, increasing by 1.4 million barrels. Refineries operated at 81.3% capacity last week after trending just under 80% during the previous week.

The February heating oil contract shed nearly 4 cents, or 1.7% to settle at $2.09 per gallon, while February reformulated gasoline dropped close to 4 cents, or 1.8%, to close at $2.06 per gallon.

Still, traders got a sense of Wednesday's numbers when the American Petroleum Institute separately reported a surge in product inventories late Tuesday. The trade group said gasoline stocks rose by 6.8 million barrels and distillates increased by 3.6 million barrels. Crude oil inventories estimates showed a 1.2 million barrel build.

"Crude inventories at Cushing did fall back, but the combination of higher imports and a lackluster increase in refinery runs combined to produce an overall inventory build that is 1.3 million barrels larger than the seasonal norm," said Barclays Capital analyst Paul Horsnell. "In terms of demand, gasoline has started 2010 fairly flat year-over-year, while starting its usual January seasonal fall in absolute terms. Distillate demand readings remain somewhat disappointing with another reading below 3.7 million barrels per day keeping the year-over-year picture looking weak after the improvement shown across December as a whole."


U.S. Oil Fund

(USO) - Get Report

ETF shed 1% to $39.22 and the the

PowerShares DB Oil Fund

(DBO) - Get Report

ETF slid 1% to finish at $27.55.

Energy shares continued to struggle, with


(CVX) - Get Report


Exxon Mobil

(XOM) - Get Report

among the Dow's top three worst performers. Chevron's stock finished the session off by 61 cents, or 0.8%, at $79.80 and Exxon shares closed down by 28 cents, or 0.4% at $69.67.

Marathon Oil

(MRO) - Get Report

provided a fourth-quarter update on Wednesday, estimating production hit about 400,000 barrels of oil equivalent per day. But the operation also warned that higher crude costs narrowed refining margins. Shares finished lower by 11 cents, or 0.3%, at $32.14.

At 10:30 a.m. EST, the Energy Information Administration reports weekly natural gas storage levels. Analysts polled by Platts are expecting a withdrawal of 253 to 258 billion cubic feet for the week ended Jan. 8. The February natural gas contract added 14 cents, or 2.5%, to settle at $5.73 per million British thermal units.

Natural gas pipeline player

Spectra Energy

(SE) - Get Report

saw shares rise 2.7% to $21.70 on an upgrade from Wells Fargo to outperform from market perform.

--Written by Sung Moss and Melinda Peer in New York