Traders dumped high oil positions on Wednesday after a reported increase in distillate inventories confounded widespread expectations.
Brent futures for February delivery dived by $1.73 to $40.64 a barrel, with most of the fall coming just after the US Department of Energy said that distillate inventories - which include diesel and heating oil - rose by 600,000 barrels to 119.9m in the week to December 17.
On Nymex, February contracts for WTI light crude fell $1.52 to settle at $44.24 a barrel.
January contracts for heating oil, which expire on December 30, lost 4.09 cents to $1.3585 per gallon. The wider traded February contracts shaved 4.92 cents to finish at $1.3540 per gallon.
Cold weather early this month had led the market to expect a bigger than normal draw in distillates. Polls of analysts by and Bloomberg had predicted that inventories would drop by more than 1m barrels.
The official data suggested that distillate demand was high and stocks are still some 12 per cent lower than at this time a year ago. But the DoE also said that crude supplies rose by 2.1m barrels to 295.9m barrels. Analysts had expected a drop of 400,000-800,000 barrels.
Gasoline stocks rose by 1.8m barrels to 211.4m barrels, as opposed to an increase of just 300,000 barrels predicted by observers.
Imports of crude into the US increased by 179,000 barrels to 10.5m barrels last week, near record highs. This explains some of the build-up in stock and means there is now plenty of energy sloshing around the US market even as Opec countries have vowed to cut production.
Another indicator that Western markets are well supplied is the sharp discount that Middle Eastern producers take on their oil. Dubai futures for February delivery, which historically trade at a similar price to Brent, were languishing just above $36 per barrel last night, well over $4 lower.
Compounding the bearish news, the US National Weather Service predicted higher than normal temperatures in the US northeast for the rest of the year and over the entire US East Coast on January 1 to 5. Warmer weather would dampen demand for crude and heating oil.