Oil prices fell toward $69 a barrel on Wednesday after U.S. data showed fuel stocks surged last week in the world's biggest energy consumer, signaling a recovery in oil demand could take more time.

The Energy Information Administration reported gasoline stocks leapt 2.9 million barrels last week, nearly three times the build that analysts had expected.

Distillate stocks -- which include diesel and heating oil -- rose by 700,000 barrels, more than double the forecast 300,000-barrel build.

The inventory numbers are wildly bearish, said Phil Flynn, analyst at PFGBest Research in Chicago.

We still have major supply and demand issues, he added.

U.S. fuel stocks remain far above five-year averages, with gasoline 7 percent above average levels and distillates 30 percent above the norm, government data show.

U.S. crude for November delivery settled 1.9 percent lower, down $1.31 to $69.57 a barrel, after gaining in the two previous days. London Brent crude fell $1.36 to $67.20.

Oil has rebounded from an 11-week low of around $66 in late September.

On the bullish side, the EIA reported a decrease in U.S. crude stocks last week of 1 million barrels, bucking analyst expectations for a rise of 2.2 million barrels. It also said petroleum product demand has recovered by 5 percent since the same time week in 2008, near the height of the financial crisis.

DOLLAR STRENGTH

Oil prices fell as a strengthening dollar prompted less investment in crude, which tends to hold its value or rise when the greenback weakens, as it had in two previous days.

The dollar rose Wednesday, by 0.2 percent against a basket of currencies <.DXY>, emerging from a 10-day low yesterday against the euro and an eight-month low against the yen.

The dollar gained on optimism that third-quarter U.S. corporate earnings reports, which began Wednesday, will show signs of an economic rebound.

The currency also gained as more large oil producers denied a report in Britain's Independent newspaper from Tuesday, which said they were secretly planning to begin pricing oil in currencies other than the dollar, a step that OPEC-member Iran took earlier this year.

Algerian oil minister Chakib Khelil, speaking at a conference in Buenos Aires, said OPEC would not move away from pricing crude in dollars any time soon, echoing similar denials from oil producers Saudi Arabia and Russia on Tuesday.

The dollar still remains the currency for commodities and I hope still a reserve currency for a long time to come, Khelil told reporters.

He said the dollar may lose some of its appeal as a reserve currency to other world currencies over the long-term.

NO MORE OPEC CRUDE

Khelil also said that OPEC was unlikely to raise oil output, which still outstrips demand, when the group next meets in December.

By cutting its crude exports since late 2008, OPEC has managed to tighten up an oversupplied (oil) market, said Brad Samples, an analyst at Summit Energy in Louisville, Kentucky.

Crude jumped to a record near $150 a barrel in July 2008, but waning demand and oversupply later pushed oil prices to near $33 a barrel in December, prompting OPEC to cut output.

Some analysts caution oil prices could slip further from current levels soon if U.S. corporate earnings disappoint.

Oil looks like it's on shaky ground as we approach the U.S. third-quarter (corporate) reporting season. A lot of near-term price gains have been won off a rebounding equity market, said Mark Pervan, a commodities analyst at the Australia & New Zealand Bank.

(Additional reporting Robert Gibbons and Gene Ramos in New York, David Sheppard in London and Fayen Wong in Perth; Editing by Christian Wiessner and Lisa Shumaker)

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