U.S. crude stockpiles jumped 5.0 million barrels last week, more than six times the forecast in a Reuters poll, as imports soared to their highest level in 18 months, data from the U.S. Energy Information Administration showed.
Distillate stock rose 4.0 million barrels and gasoline suplies added 3.6 million barrels, both well above expectations.
Worries about European debt reasserted themselves after ratings agency Fitch urged the European Central Bank to ramp up buying of euro zone debt to support Italy and prevent a "cataclysmic" collapse of the euro.
After the warning, the euro plummeted to its lowest level in 16 months against the dollar, stoking risk-aversion as it makes oil and other commodities denominated in the greenback more expensive for non-dollar holders.
Early in the session, crude futures rose after an Iranian nuclear scientist was killed by a car bomb, an incident that Tehran blamed on Israeli and U.S. agents. The news added to worries that Mideast tensions could lead to a supply disruption from Iran.
Prices then dropped sharply after the release of the EIA data in the morning, but losses were pared on news that the biggest oil workers' union in Nigeria, Africa's largest oil producer, was putting oil platforms on red alert in preparation for shutting down production, part of protests against the removal of fuel subsidies.
Near the close, selling accelerated to push prices near the day's lows.
In London, ICE Brent crude for February delivery settled at $112.24 a barrel, falling $1.04, or 0.92 percent, after dropping to a session low of $112.11, which broke below its 200-day moving average of $112.67.
U.S. February crude closed at $100.87, down $1.37, or 1.34 percent, having fallen to a session low of $100.55.
Brent's premium against U.S. crude widened slightly to close at $11.37, from $11.04 on Tuesday. <CL-LCO1=R>
Brent trading volume shot up almost 70 percent from its 30-day average, the highest level since mid-November, Reuters data showed. U.S. crude volume was up 14 percent from its 30-day average.
Oil investors fretted about mounting tensions between the West and Iran. The car bombing came as the United States has been seeking to persuade China to help toughen sanctions against Tehran over its disputed nuclear program.
Israel declined to comment on the incident and the White House denied any U.S. role.
The recent spike in oil prices has been fueled by threats from Iran to choke the West's supply of Gulf oil. The United States warned that its navy was ready to open fire to prevent any blockade of the strategic Strait of Hormuz.
The European Union brought forward to Jan. 23 a ministerial meeting that is likely to confirm an embargo on Iranian oil purchases. And big importers of Iranian oil, such as Japan, are moving to secure alternative supplies.
Investors are on a wait-and-see attitude, ahead of the EU meeting, Beutel said.
"The question is, if the embargo is adopted, will Iran follow through with its threat to shut the Strait of Hormuz? In the absence of any certainty of what Iran will do traders are wondering if prices should stay at current levels," he added.