By Barani Krishnan
NEW YORK (Reuters) - Oil prices fell after initially rallying on Wednesday as worries about huge supplies weighed on the market despite a second straight week of draws in U.S. crude.
Government data showed U.S. oil inventories fell 2.2 million barrels in the week to May 8, to below 485 million barrels, compared with analysts' expectations for a rise of 386,000 barrels. Gasoline and distillate stockpiles also declined.
But with stocks at nearly 90 million barrels more than a year ago, analysts and traders are also expecting production and imports to fall rapidly, something that has yet to occur.
Crude prices rallied right after the Energy Information Administration (EIA) issued its latest weekly supply-demand data, but the market came off its highs soon after, and eventually settled lower.
"It looks like a buy the rumor, sell the news event," said John Kilduff, partner at New York energy hedge fund Again Capital.
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U.S. crude futures settled down 25 cents at $60.50 a barrel, after rallying to $61.85.
North Sea Brent settled at $66.81, down 5 cents. It had surged to $68.17 earlier.
Crude futures have risen between 20 percent and 25 percent over the past six weeks on signs that increasing demand ahead of the peak U.S. driving season could ease a supply glut.
Some said the EIA report signalled improved fundamentals for U.S. crude, citing the near 1 million-barrel drop in supply at the futures delivery hub of Cushing, Oklahoma, as example.
Others disagreed.
"We are still about 20 percent higher than a year ago in terms of inventories," said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow, New York.
"We need to lose at least 1.5 million barrels a day from production to balance the market, but that seems not likely with the marginal cuts in U.S. output so far and OPEC looking to produce as much as it can into this market."
No. 2 U.S. oil producing state North Dakota posted a surprising output hike in March, even when U.S. crude prices were around six-year lows, latest data showed.
The CBOE crude oil volatility index <.OVX>, meanwhile, hit a six-month low, signaling that U.S. shale drillers were hedging oil output on the back end of the futures curve.
The EIA data showed lower U.S. refinery runs last week, and higher imports and production, noted Dominick Chirichella, partner at the Energy Management Institute in New York. "The data still looks suspect," he said.
(Additional reporting by Christopher Johnson and Himanshu Ojha in London and Florence Tan in Singapore; Catherine Ngai and Robbert Gibbons in New York; Editing by Marguerita Choy and Ted Botha)