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Crude oil prices retreated below $123 a barrel on Wednesday as a weekly report on U.S. inventories showed gasoline and distillate fuel inventories fell as high prices affected demand.

Futures had their largest loss in two months following a report from the Energy Department that raised concerns among investors about weaker demand for fuels. Gasoline stockpiles rose to 2.94 million barrels for the week ended May 30, its biggest increase since February, surpassing analysts' forecasts.

In the report, distillate fuels including heating oil and diesel showed a gain of as much as 2.28 million barrels, the most since July 2007. In that week, refineries operated at 89.7 percent of their capacity, or 1.8 percent more than the previous week.

Crude inventories showed a loss of 4.8 million barrels to 306.8 million barrels in the same week, according to the U.S. Energy Department.

Crude futures for July delivery slumped $1.12, or 0.90 percent, to $123.19 a barrel by 2:07 p.m. on the New York Mercantile Exchange. Futures declined to $121.84 a barrel earlier in the session. About two weeks ago on May 22, futures hit a record high of $135.09.

Gasoline futures declined 10 cents to $3.2525 a gallon on the New York Mercantile Exchange.

The average of fuel consumption in May declined 1.1 percent from a year ago, at 20.4 million barrels a day, the Energy Department said. Concerns about weaker demand grew after India and Malaysia said they planned to cut fuel subsidies. Investors believe subsidy cuts will raise prices and restrain fuel demand in the pair of developing countries.

On this basis it possible that oil futures will drop to $120 a barrel this week according to analysts.

At the pump, average gasoline prices in the U.S. are 27 percent higher than in 2007. Overnight gas prices rose 0.5 cents to $3.983 a gallon according to a AAA survey.

Brent crude futures for delivery in three months fell $2.05, or 2.56 percent, to $121.89 a barrel on the London ICE Futures Exchange.