NEW YORK (CNNMoney.com) -- Oil prices dipped a bit Wednesday after the government's weekly supply report and fresh recession concerns continued to chip away at demand.

Light, sweet crude for February delivery dropped 50 cents to settle at $37.28 a barrel, a three-week low. Oil endured volatile trade throughout the day, moving as low as $35.52 and as high as $39.45 in the session.

"There are so many dynamics facing the oil contract," said Rachel Ziemba, oil analyst at RGE Monitor. "Lots of attention is being paid to inventories, financial markets and macro economics, and oil is likely to continue be very volatile with the dollar swaying like it is."

The government's weekly supply report showed that demand for gasoline continued to be well below that of the same time last year, as was the demand for distillates, which are used to make heating oil, among other products.

The government report "underscores the fact that we are awash in oil right now," said James Cordier, portfolio manager of OptionSellers.com. "Not only is demand so poor because of the economic crisis," he added, but there is excess supply.

With slowing demand and a bottleneck of supply, "it is very difficult for the market to sustain any kind of a rally," said Cordier.

Neal Dingmann, senior vice president at Wunderlich Securities, echoed the sentiment. "Typically, these low prices would spur demand, and we are not seeing that as we see more negative news roll out," he said.

The question in the oil market now, according to Dingmann, is what price does it take for "that incremental demand - either retail or industrial - to begin to come back?"

Meanwhile, grim retail sales reports released Wednesday showed consumer weakness, pulling the Dow Jones industrial average down as much as 300 points.

The recession has caused crude oil prices to fall off for months. Crude prices hit a peak of $147.27 a barrel in midday trading on July 11. Since then, demand for crude oil has steadily fallen off, bringing prices with it.

Supply report: In its weekly inventory report, the Energy Information Administration said stockpiles of gasoline increased by 2.1 million barrels. Analysts were looking for a build of 1.8 million barrels, according to a consensus estimate of industry analysts surveyed by Platts, a global energy information provider. Gasoline stockpiles were in the upper half of the average range for this time of year.

Retail gas prices were significantly off their summer highs. But even as the pain at the pump eased, drivers were cutting back on their miles on the road. According to the report, gasoline demand has averaged 8.9 million barrels per day over the last four weeks, down by 2.1% from the same period a year earlier.

Crude stocks increased by 1.2 million barrels in the week ended Jan. 9. Analysts were looking for a more substantial build of 3 million barrels of oil. At 326.6 million barrels, oil inventories were above the upper limit of the average range for this time of year.

Distillates, used to make heating oil and diesel fuel, increased by 6.4 million barrels and were above the upper limit of the average range for this time of year. Analysts were looking for a much more modest increase of 1.7 million barrels in distillates.

Even as winter cold sets in and demand for heating oil should be rising, demand for distillates was much lower than last year. According to the report, over the last four weeks, distillate fuel demand has averaged about 4.1 million barrels per day, 2.4% below the same period last year.

"The report today showed a huge build in heating oil supplies at a time when you should expect them to drop," said Cordier. With most of the country in the midst of winter, demand for distillates should be at its high point.

Cordier said that the significant drop in distillate use during the winter months also indicates a slowdown in other sectors that use distillates, such as factories and transportation. The other component of distillate fuel is diesel fuel, which is used to power trucks and factories.

Refineries were still pumping, however. Refineries process raw crude oil into usable products like gasoline and distillate oil. Last week, refineries operated at 85.2% of their operable capacity, which was higher than the 83.7% capacity analysts were expecting.

Recession talk: Fresh signs of the global recession also weighed on oil prices. Each sign that the economy slows down chips away at demand for oil, and that weighs on the price of crude.

"The health of the economy is a huge factor in determining what kind of consumption we will have in the future," said Cordier.

The Commerce Department reported Wednesday that retail sales fell 2.7% in December, more than twice what economists had expected, according to a survey conducted by Briefing.com. The drop off represented the sixth month in a row of monthly declines and was an indication that the cash-strapped consumer was not spending.

Additionally, what is largely expected to be a batch of dismal fourth-quarter corporate results lies ahead. And with Citigroup's plans to merge its Smith Barney brokerage division with that of Morgan Stanley, fresh signs of unrest in the financial sector made investors jittery.

Saudi talk: On Tuesday, however, oil prices rose 19 cents to settle at $37.78 a barrel, ending a five-day streak of losses, as Saudi Arabia announced it would cut production levels.

Ali al-Naimi, Saudi Arabia's oil minister, said Tuesday his country plans to cut its oil production levels even below its previous target, according to Reuters.

"Saudi Arabia is jawboning," said Cordier, "talking about cutting production even further." But he also added that OPEC's ability to manipulate oil prices has diminished.

The Organization of Petroleum Exporting Countries (OPEC), which controls 40% of global oil supplies, has been trying to support prices by also limiting supply to the market.

Retail gas prices: Meanwhile, retail gas prices increased Wednesday. Prices at the pump hit a record low just before the new year, and have mostly been trending higher since then, according to a daily national survey of gas station credit card swipes.

The price of gas rose to a national average of $1.792 a gallon, up from $1.790 the day earlier, motorist group AAA reported on its Web site.

Gas prices hit a record high of $4.1144 a gallon on July 17th and then fell throughout the fall to hit a low of $1.6160 a gallon on December 30. The fall off in retail gas prices came on the back of sharply declining crude oil, which fell more than $100 a barrel from its summer peak to current levels.

Three states currently have gas prices above $2 a gallon: Alaska, Hawaii, and California. And the cheapest gas is in Wyoming, where a gallon cost $1.460, according to AAA.

The AAA figures are statewide averages based on credit card swipes at up to 100,000 service stations across the nation.