Oil futures fell sharply Wednesday after the government reported a surprise increase in U.S. oil stockpiles and as the first deliveries from the Strategic Petroleum Reserve hit the market.

Light, sweet crude for September delivery settled down $2.19, or 2.2%, to $97.40 a barrel on the New York Mercantile Exchange. Brent crude on the ICE Futures Europe exchange recently traded down 90 cents, or 0.8%, to $117.38 a barrel.

U.S. oil inventories rose 2.3 million barrels last week, the DOE's Energy Information Administration said, bucking expectations for a decline. At the same time, U.S. refineries pared their operations, suggesting that demand for refined fuels could be weakening during the peak summer driving season.

"We should be peaking on refinery runs at this time of year," said Phil Flynn, oil analyst at PFG Best in Chicago.

Crude stockpiles had fallen for seven straight weeks prior to Wednesday's build, as refiners ramped up operations to accommodate higher gasoline demand during the summer driving season.

Meanwhile, the government announced the first release of stockpiles from U.S. strategic reserves, saying SPR inventories fell 2.3 million barrels last week.

The International Energy Agency announced in June that its members would tap 60 million barrels of emergency stockpiles in a bid to ease oil prices and make up lost Libyan exports.

Gasoline inventories rose 1 million barrels last week, the EIA said. Stockpiles of distillates, including heating oil and diesel, rose 3.4 million barrels, while refineries cut their operations 2 percentage points to 88.3% of capacity.

Analysts surveyed by Dow Jones Newswires had expected oil inventories to fall 1.4 million barrels. Gasoline stocks were expected to rise 400,000 barrels, while distillate stocks were seen climbing 1.7 million barrels. Refiners were expected to leave runs unchanged at 90.3% of capacity.

Wednesday's decline brought Nymex crude to its lowest settlement since July 18. Still, the contract has barely budged from a tight range between $95 and $100 a barrel over the last two weeks, as debt woes in Europe and the impasse over raising the U.S. debt ceiling leave traders wary of laying big positions.

"Prices have been well and truly stuck," analysts at Barclays said in a note to investors. "That is not because nothing has been happening ... too many things have been happening."

Crude futures also traded lower following a surprise drop in U.S. durable goods orders last month. The decline signals the sluggish economy is weighing on the country's manufacturing sector, a major user of energy.

The prospect of disruptions to production on the Gulf Coast, however, could put a floor on oil prices. On Wednesday, the three largest oil-and-gas producers operating in the Gulf of Mexico said they were evacuating personnel from offshore platforms ahead of a possible tropical cyclone.

The companies have said Gulf production hasn't been affected. The region accounted for about 30% of all U.S. oil production last year.

Front-month August reformulated gasoline blendstock, or RBOB, settled down 1.13 cents, or 0.4%, to $3.1423 a gallon. August heating oil settled down 3.08 cents, or 1%, to $3.0826 a gallon.