By Timothy Puko

Oil prices extended their slump after data showed the biggest weekly U.S. crude surplus on record, the latest sign of the hurdles facing traders banking on higher prices.

The supply data prompted investors to reduce expectations that two years of oversupply in the oil markets is coming to an end. U.S. prices immediately shed nearly $1 a barrel and losses spread into gasoline and diesel futures.

U.S. crude futures fell $1.33, or 2.9%, to $45.34 a barrel on the New York Mercantile Exchange.

"You could easily make the argument it's the most bearish report of all time," said Bob Yawger, director of the futures division of Mizuho Securities USA. "There'snothing to support the market."

The U.S. Energy Information Administration said crude-oil stockpiles rose by 14.4 million barrels in the week ended Oct. 28 -- the largest weekly increase in 34 years of data collected by the EIA. Analysts polled by The Wall Street Journal expected a more modest increase of 1 million barrels.

U.S. oil has now fallen 12% in just two weeks since hitting a one-year high on Oct. 19. It is the latest in a series of sharp retreats to hit the market this year every time prices hit around $50 a barrel.

Many traders consider that a ceiling because supplies are still so strong, coming from both cost-cutting shale-oil drillers in the U.S. and national oil companies abroad fighting for customers. Traders are skeptical about plans from global exporters to cut production. Russian data released Wednesday showed a new post-Soviet era output record, and U.S. government data showed weekly imports climbed to a four-year high.

Oil's sharp fall in recent weeks marks the return of some of the volatility that had characterized the market earlier this summer. Even as equity markets have largely stabilized since March, commodities and currencies have usually kept up their wild swings. This is oil's third retreat from $50 toward $40 within five months, a shift often characterized by moves larger than 10% within just a few weeks.

Many other markets had become placid as traders became focused on very few events, and grew certain of both a rate increase coming only in December and the strong likelihood of Hillary Clinton beating Donald Trump in the U.S. presidential election, said Alain Bokobza, head of global asset allocation at Société Générale SA in Paris. But one thing those beliefs did do is spur a dollar rally throughout October, which heaps more volatility on oil markets that are traditionally volatile.

A rising dollar makes dollar-denominated commodities like oil more expensive for traders who are based in countries using other currencies, and those commodities often fall as the dollar rises. That often-strong connection went dormant for several months, but appeared to pick up in mid-October when the dollar kept rising and a month-long rally in oil began to reverse.

Oil was also highly influenced by the Organization of the Petroleum Exporting Countries, which had said in late September it would consider an agreement on output cuts later that year. That made oil one of the few assets impacted by two of the biggest events to captivate the markets, OPEC deal-making and rate decisions coming from the fed.

"The volatility (in oil) never goes away. It can be high or higher," Mr. Bokobza said.

Even bullish traders had been skeptical of OPEC, but many were also pointing to other signs that the oil market had fundamentally changed regardless of what OPEC did.

Before last week, U.S. stockpiles had drained seven out of the eight prior weeks, and other major storage hubs showed signs they were falling from record highs, too. It had many bullish traders convinced oversupply may have already ended, extending oil's rally.

Last week's record storage addition puts U.S. crude stockpiles now back nearly at the levels they were before that string of drawdowns, about 480 million barrels, according to the EIA. That, combined with continued bickering from OPEC members and uncertainty over the presidential election has caused Gresham Investment Management LLC to sell out of bullish oil positions this week.

"The two elements of what lifted prices up are now in question," said Jonathan Berland, managing director at the firm, which manages about $7.8 billion and specializes in commodities.

Gasoline futures lost 3.62 cents, or 2.4%, to $1.4479, a one-month low. Diesel futures lost 5.04 cents, or 3.3%, to$1.4665 a gallon, also a one-month low.

Alison Sider contributed to this article.

Write to Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

November 02, 2016 15:26 ET (19:26 GMT)

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