UPDATE 9-Oil drops back on hopes for an easing of Ukraine tension

Wed Jun 4, 2014 4:48pm EDT

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* U.S. crude stocks fell 3.4 mln bbls last week -EIA

* Cushing crude stocks fell 321,000 barrels last week -EIA

* U.S. distillate stocks up 2.01 mln bbls last week -EIA (Adds Cushing data, Brent/U.S. crude spread, paragraphs 7-9)

By Robert Gibbons

NEW YORK, June 4 (Reuters) - Brent and U.S. crude ended lower on Wednesday as hopes that a peace plan from Ukraine's president-elect might help ease the crisis with Russian separatists cooled oil's earlier rally.

Rising U.S. distillate stockpiles and weak distillate profit margins in Northwest Europe also helped trigger the reversal by crude futures.

Brent crude for July delivery fell 42 cents to settle at $108.40 a barrel. Brent settled back above the 100-day moving average of $100.32, but fell as low as $108.25 in post-settlement trading.

U.S. July crude dipped 2 cents to settle at $102.64, after rising as high as $103.69 immediately after the release of U.S. oil inventory data that showed crude oil stocks fell last week.

"There was short-covering ahead of the data, but some selling afterward, and the Ukraine news also helped trigger some selling," said Bill Baruch, senior market strategist at iitrader.com LLC in Chicago.

The U.S. Energy Information Administration (EIA) said U.S. crude stocks fell by 3.4 million barrels last week as imports dropped, a bigger slide than the expected 300,000-barrel draw and also bigger than the inventory drop that was reported by an industry group on Tuesday.

Crude stocks at the Cushing, Oklahoma, delivery point of the U.S. crude oil contract, also fell, declining 321,000 barrels.

Falling Cushing stocks have been supportive to U.S. crude prices and helped trim Brent's premium to U.S. crude. The spread between the two contracts CL-LCO1=R narrowed to $5.76 on Wednesday based on settlements.

Brent's premium to U.S. crude fell to $5.69 during the session, the narrowest spread since April 15.

U.S. distillate inventories, including diesel and heating oil, rose 2.01 million barrels, the EIA said, much more than the 400,000-barrel build that had been expected. Gasoline stocks also rose, by 210,000 barrels.

Also weighing on distillate futures, diesel refining margins in Europe have dropped to a four-year low below $10 a barrel, pressured by Russian and U.S. exports.

"U.S. crude's bullish response to the supportive EIA report proved to be short-lived as heavy product markets ultimately weighed on crude values," said Jim Ritterbusch, president at Ritterbusch and Associates in Galena, Illinois.

U.S. July heating oil fell 1.77 cents to settle at $2.8481 a gallon after sliding to $2.8470. U.S. July gasoline fell 1.35 cents to settle at $2.9444 a gallon.

Ukrainian President-elect Petro Poroshenko said it was possible he would meet Russian leader Vladimir Putin at commemorations in France this week marking the anniversary of the World War Two D-Day landings.

Poroshenko said a peace plan he is working on to end violent clashes between separatists and government forces in Ukraine would include decentralization of power, a wide amnesty, and elections for local government. (Additional reporting by David Sheppard in London and Florence Tan in Singapore; Editing by Dale Hudson, Susan Thomas, Lisa Von Ahn, Peter Galloway and Andre Grenon)

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