Oil pared early gains to drop below $72 a barrel on Wednesday, extending losses from the previous session, as rising U.S. crude stockpiles and a dip in equity markets outweighed bullish economic data.

U.S. crude for October was down 20 cents to $71.85 a barrel by 1147 GMT (7:47 a.m. EDT), after falling $2.32 on Tuesday. Earlier on Wednesday, prices had recovered to $72.64, before turning lower.

Brent crude fell 2 cents to $71.80 a barrel after losing $2.44 the previous day.

Investors took the opportunity to lock-in profits on Tuesday after crude touched the key psychological $75 mark for the first time since last October, crowning a near 130 percent jump in prices from the lows at the turn of the year.

The sell-off was extended after the American Petroleum Institute (API) reported an unexpected 4.3 million-barrel rise in U.S. crude stocks, confounding analysts' expectations for a 1.1-million-barrel fall, and coming after the 8.4-million-barrel drop the week before which had sparked the latest rally.

A lot of people are expecting a build in crude stocks because last week's draw was large, said Tony Nunan, risk manager at Mitsubishi Corp.

People are holding stocks offshore and sooner or later these would show in crude stocks in the U.S.

Gasoline stocks fell 1.8 million barrels, the API said, more than the 1 million-barrel drop predicted, while distillates fell by 146,000 barrels, versus forecasts for a 300,000 barrel rise.

Nunan noted that while the figures from industry body API have occasionally diverged from those of the government Energy Information Administration (EIA), due out at 1430 GMT (10:30 a.m. EDT) on Wednesday, the two have been consistent for the last two weeks.

PRICING IN A RECOVERY?

Oil prices were torn between a dip in equities and weakness in the U.S. dollar on Wednesday, which traders said have been the two key external factors in the crude market in 2009.

Investors have been viewing recent strength in equity markets as a sign of impending economic recovery, which should boost demand for oil, while weakness in the dollar tends to boost buying of commodities priced in the greenback.

European shares fell on Wednesday, snapping a four-session winning streak despite Ifo's closely-watched survey of German business morale showing a bigger-than-expected improvement.

Oil analysts said a lot of the positive economic data had already been factored into the price of crude by traders, while global inventories of crude remain at very high levels.

Venezuela's oil minister Rafael Ramirez said OPEC is unlikely to raise output at its September meeting, despite concerns from some quarters that oil prices are too high for a still fragile global economy.

Inventories have declined but they remain above average. We need for them to come down to the average levels, Ramirez said.

Another member of the Organization of the Petroleum Exporting Countries, Iran, said oil demand was set to increase next year by up to 1 million barrels per day after this year's decline.

(Additional reporting by Ramthan Hussain in Singapore; editing by William Hardy)

OPEC