Oil dives below $35, lowest in 11 years, as U.S. supply swells

NEW YORK Crude oil prices plunged 6 percent on Wednesday, diving below $35 per barrel for the first time since 2004 as data showing a shockingly large build-up of U.S. gasoline supplies fed fears that a global surplus was still growing.

The sell-off, the biggest one-day drop for global benchmark Brent futures since the start of September, takes losses this year to more than 8 percent, a descent stoked by worsening Chinese economic data, the world's No. 2 oil consumer, and a fierce row between Saudi Arabia and Iran that some say may be more bearish than bullish.

The focus on Wednesday was U.S. government data showing a 10.6 million-barrel surge in gasoline supplies, the biggest build since 1993, which some traders said signaled a slow-down in demand that could prolong the global glut. The figures overshadowed a 5.1 million-barrel fall in crude stocks. [EIA/S]

"Gasoline was the sole source of strength within the complex, and that looks to have ended," said John Kilduff, a partner at energy hedge fund Again Capital.

Brent futures LCOc1 fell $2.19 to settle at $34.23 a barrel. Earlier, it fell to as low as $34.13, its lowest level since the start of July 2004.

U.S. crude futures CLc1 fell $2.00 to settle at $33.97 a barrel, its lowest close since February 2009.

Traders shrugged off rising geopolitical risks, including an apparent North Korea nuclear test. Many reckoned that the row between Saudi Arabia and Iran posed little threat to oil shipments, but made an agreement on output even less likely.

"I think we'll see a price war soon to keep market share," said Tariq Zahir, an analyst at Tyche Capital Advisors. "Prices will get lower and I think we'll hit $32 again."

Following an 18-month rout, the fierce selling this year has caught some by surprise, and prompted others to pick up bearish options at lower prices. The $30 February WTI put CL300N6 was the second most traded strike price at 12,700 lots after $30 March puts CL300O6 at 21,500 lots.

The CBOE volatility index .OVX, a gauge of options premiums based on moves in the U.S. oil exchange traded fund, was up 5.5 percent after moving sideways on Tuesday.

"We've entered some unchartered territories, so it's no surprise that traders are pumping volatility," said John Saucer, vice president of research and analysis at Mobius Risk Group.

Feeding into the weak market sentiment, 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.

(Additional reporting by Simon Falush in London, and Henning Gloystein, Jacob Gronholt-Pedersen and Roslan Khasawneh in Singapore; Editing by Marguerita Choy)