Oil futures pared their gains after the U.S. government said oil inventories fell less than expected last week.

Light, sweet crude for August delivery rose $1.70, or 1.8%, to $98.35 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange added $3.68, or 3.2%, to $117.30 a barrel.

Crude prices had begun the day higher following a pair of reports pointing to improving U.S. employment levels. Nymex crude hit an intraday high $99.42 a barrel before the 11 a.m. EDT inventory report sent prices slightly lower, though still higher on the day.

"It's kind of a disappointing report," said Tom Bentz, director at BNP Paribas Commodity Futures. "The market, since bottoming last week, has been up relentlessly every single day."

The Department of Energy said oil inventories fell 900,000 barrels, less than the 2.4-million-barrel decline forecast by analysts surveyed by Dow Jones Newswires.

U.S. crude inventories have fallen for five straight weeks, a sign that demand remains strong from refiners. Inventories, however, are still above last year's levels amid the backdrop of a weak economic recovery.

The DOE said gasoline inventories last week fell 600,000 barrels. Distillate stocks, including heating oil and diesel, declined 200,000 barrels. Analysts expected gasoline and distillate stockpiles to climb 900,000 and 200,000 barrels, respectively.

The report was delayed by a day due to the Independence Day holiday Monday.

Oil futures began the day higher after payroll giant Automatic Data Processing Inc. (ADP) said the private sector added 157,000 jobs last month, above the 95,000 expected by economists polled by Dow Jones Newswires. The Labor Department, meanwhile, said new claims for unemployment benefits fell last week for the first time in three weeks by 14,000 to a seasonally adjusted 418,000. Economists expected a drop of 3,000.

Crude market participants closely watch U.S. employment data for signs that employment levels are improving, which imply stronger demand for oil and refined fuels.

"There's just a general sense of optimism in the market," said Matt Smith, oil analyst at Summit Energy in Louisville, Ky.

Both sets of data set the stage for June's nonfarm payrolls report, the most closely watched report on U.S. employment levels, due Friday from the Bureau of Labor Statistics.

Crude had traded higher overnight after the American Petroleum Institute, an industry group, said late Tuesday that crude supplies last week declined 3.2 million barrels, while gasoline and distillate stocks dropped 1.9 million and 1.6 million barrels, respectively.

Front-month August reformulated gasoline blendstock, or RBOB, recently gained 9.23 cents, or 3.1%, to $3.0899 a gallon. August heating oil added 10.05 cents, or 3.4%, to $3.0638 a gallon.