Benchmark U.S. crude fell by $1.95 to end at $89.90 per barrel. Oil has tumbled more than 15 per cent this month and is at its lowest level since Oct. 21.
Other commodities such as copper and cotton fell sharply as well. Stocks markets in Asia and Europe fell sharply, while U.S. markets erased most losses with a late-day rally.
Analysts say oil is in an extended slump that should lead to cheaper gasoline and other petroleum-based fuels this summer. Gasoline, which is made from oil, already has dropped by nearly 26 cents per gallon since early April.
The national average is now $3.68 per gallon; some experts say it could fall as low as $3.50 by Independence Day. The average price of diesel fuel is below $4 for the first time since February. It's good news for an economy that has slowed down since last year's fourth quarter.
"This is a good thing for the consumer, that's for sure," independent oil analyst Andrew Lipow said.
Sterne Agee analyst Tim Rezvan cut his forecast for the average price of oil this year by 8 per cent to $99 per barrel.
Concern about the strength of the global economy contributed to Wednesday's decline. Europe's leaders gathered in Brussels amid questions on their willingness to take the steps necessary to spur economic growth.
Some economists have warned of a "severe recession" in the 17 nations that use the euro currency. Elsewhere, China says its economy is cooling down, while the pace of growth has tailed off in the U.S. after hitting 3 per cent in the last three months of 2011.
The latest report on U.S. crude supplies also depressed oil prices Wednesday. The government said U.S. supplies grew last week by 900,000 barrels to 382.5 million barrels, the highest level since 1990. Analysts expected supplies to grow by 750,000 barrels. The price of oil and other commodities tend to fall as more supplies become available.
Oil's recent decline has reversed the sharp increase seen in the winter. Traders boosted the price as Iran clashed with Western nations over its nuclear program. Some estimated the impasse added $15 to $20 to the price of oil.
The U.S., Europe and other countries took steps to inhibit Iran's oil trade in an effort to get it to the negotiating table. The tactic now appears to be working. Iran is meeting with the U.S. and other world powers, and analysts say it may avoid an oil embargo by the European Union planned for July 1 if it lets international inspectors into its facilities.
Meanwhile, Saudi Arabia, Libya and Iraq have been delivering more oil to world markets to cover potential lost oil supplies from Iran.
Oil prices could still rise later this year, analysts said. Iran could resume its standoff with the West. Or Organization of Petroleum Exporting Countries could pull back on oil production if oil drops too low. And hurricane season is about to begin in the U.S., raising the potential for disruptions to production in the Gulf of Mexico.
In other futures trading, heating oil fell by 4.9 cents to end at $2.812 per gallon while wholesale gasoline lost 6.5 cents to finish at $2.872 per gallon. Natural gas added 3 cents to finish at $2.737 per 1,000 cubic feet.
Brent crude, which helps set the price of oil imported into the U.S., dropped to a new low for the year. It lost $2.85 to end at $105.56 per barrel in London.
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