By Barani Krishnan

NEW YORK (Reuters) - Oil prices settled down more than 1 percent on Wednesday after the U.S. government reported a smaller-than-expected inventory drawdown, and as investors fretted about Britain's upcoming vote on whether to stay in the European Union.

Crude futures rose in early trading, with global benchmark Brent and U.S. crude's West Texas Intermediate (WTI) both trading above $50 a barrel at one point.

Prices headed lower after the U.S. Energy Information Administration (EIA) reported a stockpile decline of 917,000 barrels for the week ended June 17.

While it was the fifth consecutive weekly draw, the EIA's number was smaller than a 1.7 million-barrel drawdown forecast by analysts in a Reuters poll, and only about a third of the 5.2 million-barrel drop reported on Tuesday by trade group the American Petroleum Institute (API).

Brent's front-month contract, August, settled down 74 cents, or 1.5 percent, at $49.88 a barrel.

August WTI fell 72 cents, or 1.4 percent, to settle at $49.13.

Further out, the discount for WTI for December 2016 versus December 2017 widened to as much as $1.81 a barrel, its biggest discount in six weeks. Traders said they believed producers were responsible for the move, as they were probably locking in 2017 prices at above $52. The discount encourages investors to store oil for later delivery due to better forward prices.

The huge draw reported by the API had boosted crude late on Tuesday, after prices had settled lower for the day.

The oil market was also buzzing on Wednesday over this week's unusually large volumes in complex crude options on bets the market will likely tumble by early next year.

The draw reported by the EIA is "decidedly bearish", said Troy Vincent, analyst at New York-based crude cargo tracker ClipperData. He expected WTI to "move back below $49 this week", citing worries over gasoline and distillate inventories too.

U.S. gasoline demand over past four weeks rose 3.9 percent year-on-year, but stocks of the motor fuel rose 627,000 barrels last week, while distillates grew 151,000 barrels.

Investors also braced for more market swings due to currency market gyrations on speculation over Britain's referendum on the EU on Thursday. The U.S. dollar's moves help determine demand for oil among holders other currencies.

"In any event, our perception of a choppy/sideways trading affair within about a $5-6 range per nearby WTI and Brent remains unchanged," Jim Ritterbusch of Chicago-based oil markets consultancy Ritterbusch & Associates said in a commentary. He advised a neutral position on oil until the referendum.

(Additional reporting by Aaron Sheldrick; Editing by Marguerita Choy and David Gregorio)