Police and rescue workers said the villagers had been collecting the fuel when the liquid ignited and Emmanuel Adebayo, Lagos' police commissioner, said between 150 and 200 people had died.
The Nigerian Red Cross had said it was treating survivors, but no survivors were to be seen.
Over 1,000 people in Africa's oil giant have died in recent years when the fuel they were pilfering from tapped pipelines caught fire - and officials said it would likely happen again.
"Because this thing has happened many times before we thought it would be a deterrent, but apparently it wasn't enough deterrent for these people who died," Tola Kasali, the health commissioner of Lagos state, said as he surveyed the scene near Ilado, about 45km east of the main Nigerian city of Lagos.
"Anywhere you have a pipeline in this country, you have this problem because people are greedy and they want quick money."
Earlier on Friday, Abiodun Orebiyi, secretary-general of the Red Cross, said vandals were tapping into the pipeline to steal oil when the blast erupted, setting fire to about 500 jerrycans full of oil.
It wasn't known what started the fuel blaze.
Grim-faced rescue workers swung corpses into a mass grave as dozens of other scorched bodies awaited collection next to the pipeline.
Security officers try to empty
jerrycans at the site of the blast
It appeared some victims whose bodies lay further away had tried to flee the unfolding disaster only to be overtaken by flames spreading across the fuel slick.
By day's end about 100 of the dead had been interred and Kasali said clean-up efforts would begin again on Saturday.
Other bodies floated in nearby waters or lay on the beach with their white skeletons starkly outlined against a beach charred black by the fire.
Kasali said they, too, would be entombed in a common grave.
He said the bodies posed a health risk to the millions of inhabitants of Lagos, whose skyline could be seen on the horizon.
"We just decided to give them a mass burial because no one can recognise them, even their family members can't identify them," Kasali said.
"We're concerned that if we don't do that, we'll create a health emergency in Lagos since it happened by the shore and the water will just flow back into the city."
The blaze took place far from the centre of the small fishing village of Ilodi and it was unclear if there were witnesses. Boatmen in the area said they heard an explosion before dawn on Friday and saw the glow of flames from the area.
Dozens of plastic jerrycans that had contained pilfered petroleum, twisted by the heat, bobbed in the nearby waters of the coastal mangrove swamp.