Oil falls 1.6%, settling at $68.65, as crude stockpiles rise and stock market slumps

• Brent crude fell below $80 after U.S. crude stocks increased by 6.5 million barrels in the previous week.
• Inventories rose sharply even as U.S. crude production slipped due to the effects of offshore facilities closing temporarily for Hurricane Michael.
• Prices had been rising on concern about a decline in Iranian exports due to U.S. sanctions and U.S.-Saudi tension over the disappearance of Saudi journalist Jamal Khashoggi.

Andrew Burton | Getty Images

Oil prices fell on Thursday as the fourth weekly increase in U.S. crude inventories suggested ample supply, while Saudi-U.S. tension and falling Iranian exports lent support.

Crude futures came off one-month lows in early trading as U.S. stock markets bounced. But equities turned sharply lower in late morning trade, and the oil market fell to session lows.

U.S. West Texas Intermediate crude ended Thursday's session down $1.10, or 1.6 percent, at $68.65, after hitting a one-month low at $68.47 earlier in the session. WTI plunged 3 percent on Wednesday.

Brent crude, the global benchmark, was down 67 cents at $79.38 a barrel at 2:30 p.m. ET. It fell as low as $78.69 earlier in the day, down $8 from a nearly four-year high reached on Oct. 3.

On Wednesday, government data showed U.S. crude inventories rose 6.5 million barrels last week, the fourth straight weekly increase and almost three times what analysts had forecast.

Inventories rose sharply even as U.S. crude production slipped 300,000 barrels per day (bpd) to 10.9 million bpd due to the effects of offshore facilities closing temporarily for Hurricane Michael.

"Stocks are building," said Olivier Jakob, oil analyst at Petromatrix. "It's a continuous trend. Week after week, it does start to add up."

Helping to support prices, traders on Thursday said a report by market intelligence firm Genscape showed that stockpiles at Cushing rose less than 1 million barrels from Friday through Tuesday.

Oil prices had been rising this week on concern about a decline in Iranian exports due to U.S. sanctions and tension between the United States and Saudi Arabia after the disappearance of Saudi journalist Jamal Khashoggi.

U.S. lawmakers pointed the finger at the Saudi leadership over the disappearance of the Saudi critic, suggesting sanctions could be possible. Saudi Arabia denies that it had any role in Khashoggi's disappearance.

But President Donald Trump on Wednesday gave Saudi Arabia the benefit of the doubt in the journalist's disappearance, suggesting the White House may not take additional action against Saudi Arabia.

Investors worry Saudi Arabia could use oil supply to retaliate against critics. But Saudi Arabia has assured OPEC that it is "committed, capable and willing" to ensure there will be no shortage in the oil market, OPEC's secretary-general said on Wednesday.

Signs that Iranian oil exports have been falling more steeply than some in the market expected amid looming U.S. sanctions have also underpinned the market.

U.S. sanctions on Iranian oil take effect on Nov. 4 and buyers are already stopping or scaling back their Iranian crude dealings, according to tanker data and industry sources.

Exports have declined already to about 1.5 million barrels per day (bpd), up to 1 million bpd below levels seen earlier this year. Some analysts say the drop in supplies may be starting to wane as a source of price support.

"Assuming that Iranian crude exports will stabilize around 900,000 bpd, one can make a strong case that the peak bullish impact of Iran is in fact already behind us," analysts at JBC Energy said in a report.

Saudi Arabia and Kuwait will struggle to resume oil production from jointly operated fields that produced some 500,000 bpd any time soon due to operational differences and souring political ties, sources said on Wednesday.

— CNBC's Tom DiChristopher contributed to this report.