U.S. crude falls on glut worries despite U.S. stock draw

By Barani Krishnan

NEW YORK (Reuters) - U.S. oil prices fell on Wednesday, reversing an early rally, and Brent also pared gains as worries about the global supply glut offset encouraging U.S. government data showing a surprise drop in domestic crude stockpiles.

The early rally came on talk that major producers might tackle a glut that has sent prices to 12-year lows.

U.S. prices rallied to above $29 after data showed crude inventories unexpectedly fell by 754,000 barrels in the last week due to lower imports and a drop in refinery runs. Analysts had expected a rise of 3.6 million barrels.

But the market pared gains on renewed worries about the massive overhang of global supply which pushed prices to 12-year lows late last month. Traders noted the record high inventories hit last week at the Cushing, Oklahoma delivery point for U.S. crude futures.

Trade was choppy.

"We believe there's been short covering on the headline and we feel we will continue to see rallies being sold," said Tariq Zahir, trader at Tyche Capital Advisors in New York.

"Since we are going into refinery maintenance season and coupled with Iranian oil coming into the market, any rally will be short-lived."

U.S. crude was down 5 cents at $27.92 a barrel by 12:04 p.m. EST (1704 GMT), after falling as low as $27.39.

U.K.-based global crude benchmark Brent rose more than $1 to $31.90 a barrel, then pared gains to $31.04.

Oil prices rose early in the sessionon talk Iran's oil minister said Tehran was ready to negotiate with Saudi Arabia.

The early gains came the session after the third-biggest daily fall since the financial crisis.

Kremlin oil tsar Igor Sechin also proposed producing countries cut output by 1 million barrels per day - without saying whether non-OPEC member Russia would do so.

(Additional reporting by Alex Lawler and Amanda Cooper in London; Editing by Alexander Smith and David Gregorio)