Oil prices fell more than 3% on Wednesday, continuing a streak of volatile trading, as the Group of Seven (G7) nations considered a price cap on Russian oil above the current market level and as gasoline inventories in the United States built by more than analysts' expected.

Brent futures for January delivery fell $2.95, or 3.3%, to settle at $85.41 a barrel. U.S. crude fell $3.01, or 3.7%, to $77.94 per barrel. In early trade, both contracts had risen by over $1 a barrel.

U.S. gasoline stocks rose by 3.1 million barrels, according to the Energy Information Administration, far exceeding the 383,000 barrel build that analysts had forecast.

"The build in gasoline is kind of a shock," said Phil Flynn, an analyst at Price Futures group. "The increase in gasoline supplies suggests that maybe we're seeing demand weakening or that gasoline is going on the rack ahead of the holidays."

EIA data also showed a 3.7 million barrel draw in crude inventories, compared with analysts' expectations in a Reuters poll for a 1.1 million-barrel drop.

Prices were hit further by reports that the G7 price cap on Russian oil could be above the level it is trading.

G7 nations are looking at a price cap on Russian seaborne oil in the range of $65-70/bbl, according to a European official on Wednesday.

Meanwhile, Urals crude delivered to northwest Europe is trading around $62-$63/bbl, although it is higher in the Mediterranean at around $67-$68/bbl, Refinitiv data shows.

Because production costs are estimated at around $20 per barrel, the cap would still make it profitable for Russia to sell its oil and in this way prevent a supply shortage on the global market.

A senior U.S. Treasury official said on Tuesday that the price cap will probably be adjusted a few times a year.

The news added to concerns about demand from top crude oil importer China, which has been grappling with a surge in COVID-19 cases, with Shanghai tightening rules late on Tuesday.

Further pressure came from an OECD economic outlook anticipating a deceleration in global economic expansion next year.

"On the bright side, the OECD does not envisage a global recession and maybe this helped oil prices and stocks strengthen further," said analyst Tamas Varga at PVM Oil Associates.

Price found some support after minutes from the Federal Reserve's November meeting showed most policymakers agreed it would soon be appropriate to slow interest rate hikes.

Reuters