US oil sheds 5.56%, posts worst settle since Dec. 2008

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Oil prices hit their lowest in over 11 years on Wednesday, as the row between Saudi Arabia and Iran was seen making any cooperation between major exporters to cut output even more unlikely, and after a sharp rise in U.S. gasoline inventories.

Benchmark Brent crude futures were at $34.26 a barrel — down 5.93 percent — and at their lowest since early June 2004, having staged their largest one-day drop in percentage terms in nearly five weeks.

U.S. crude futures settled down $2, or 5.56 percent, at $33.97 a barrel — its worst settle since Dec. 19, 2008 — after already slipping 79 cents the previous day.

Last week, the U.S. added 10.1 million barrels of gasoline, the Energy Information Administration said. It added 900,000 the week before. However, U.S. crude inventories dropped by 5.1 million barrels last week.

"It's the biggest increase in gasoline supply since 1993," said John Kilduff, founding partner at Again Capital. "Gasoline prices are going to collapse"

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RBOB gasoline futures fell about 7.5 percent.

Also, evidence of slowing economic growth in China and India has fueled fears that even strong demand elsewhere may not be enough to mop up the excess crude that has resulted from near-record production over the last year.

The furor over Saudi Arabia's execution of a Shi'ite cleric has stripped nearly 8 percent off the price of oil in the last three trading days alone and has killed speculation that OPEC members might agree on production cuts to lift prices.

"There are rising stockpiles and the tension between Iran and Saudi Arabia make any deal on production unlikely," said Michael Hewson, head of strategy at CMC Markets.

Oil has slumped from above $115 in June 2014 as shale oil from the United States has flooded the market, while falling prices have prompted some producers to pump even harder to compensate for lower revenues and to keep market share.

Adding to this oversupply, Iranian oil exports are widely expected to increase in 2016 as Western sanctions against Tehran for its alleged nuclear weapons program are likely to be lifted.

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"Shale production and increasing capacity from countries like Russia who need to protect revenue combined with expectations of further Iranian supply mean actual production as well as expectations of future production are rising," Hewson said.

Still, a senior Iranian oil official said the country could moderate oil export increases once the sanctions are lifted to avoid putting prices under further pressure.

Also feeding into broad market weakness, a survey showed that China's services sector expanded at its slowest pace in 17 months in December, following on from weak factory data on Monday which also knocked markets globally.

The People's Bank of China set a weaker midpoint for the yuan, prompting concerns that the economy of the world's largest energy consumer could be in worse shape than believed.

In the United States, concerns over mounting oil stock levels persisted, with crude inventories likely to have risen by 439,000 barrels last week, according to a Reuters poll of eight analysts.

— CNBC's Fred Imbert contributed to this report.