But the price drop was limited. Crude held above $64 a barrel as gasoline prices surged more than 4 percent after the U.S. government said the nation's gasoline inventories declined for the eighth straight week and that demand is still strong.
U.S. crude oil inventories rose by 4.3 million barrels to 332.7 million barrels last week, according to the Energy Information Administration, while gasoline inventories dropped 5 million barrels to 205.2 million. The drop was much larger than the market had anticipated and pushed gasoline inventories into the lower half of their average range for this time of year.
Concerns about tight domestic supplies offset much of the relief over Iranian President Mahmoud Ahmadinejad releasing the British sailors, who the country claims entered Iranian waters. Iran is located along the Strait of Hormuz, a key channel through which many oil tankers pass.
Light, sweet crude for May delivery dipped 26 cents to settle at $64.38 a barrel on the New York Mercantile Exchange, the third decline in the last 11 sessions.
Traders have shaved off only part of the nearly $5 premium they added to crude futures after the sailors were taken hostage on March 23.
"There's a lot of inherent strength in the market," said Mike Fitzpatrick, vice president for energy risk management at Fimat USA.
Gasoline futures soared 8.77 cents to $2.1054 a gallon Wednesday. They have risen more than 30 percent since the beginning of the year.
Because gasoline futures keep rising, "we'll probably maintain pump prices at the recent highs," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Ill. "Generally, this year's spate of refinery issues has been more pronounced than what we usually see."
At the retail level, U.S. pump prices have surged to an average of $2.70 a gallon for regular unleaded gasoline Wednesday, up from $2.48 a month ago, according to AAA.
Inventories of distillates, which include heating oil, were unchanged at 118 million barrels.
Refineries operated at 87 percent of capacity for the second straight week.
Over the last four weeks, gasoline demand has averaged nearly 9.3 million barrels per day, the EIA said, which is 1.7 percent above the same period last year.
In other Nymex trading, heating oil futures rose 2.57 cents to settle at $1.8644 a gallon, and natural gas prices rose 8.9 cents to settle at $7.515 per 1,000 cubic feet.
On London's ICE futures exchange, Brent crude pared earlier losses and rose 59 cents to settle at $68.40 a barrel.
Meanwhile Wednesday, the U.S. Energy Department said it is passing on an initial bid it received to buy as many as 4 million barrels for the U.S. Strategic Petroleum Reserve. The department said the bid was too high, and that it would solicit more bids later this month.
The SPR is the nation's emergency stockpile of crude oil. The Energy Department is trying to replace about 11 million barrels of oil it sold after Hurricane Katrina hit the Gulf coast in the summer of 2005.