U.S. crude for December delivery lost $5.43 to end the session at $66.75 a barrel in New York.
Oil had been down about $3.98 a barrel at $68.20 just before the report's release.
Wednesday's settle price was the lowest since June 13, 2007, when oil ended the day at $66.26 a barrel.
Wednesday was also the first day of front-month trading for the December contract. The November contract closed at $70.89 a barrel when it expired on Tuesday.
U.S. inventories: In its weekly report, the government said crude stockpiles had risen by 3.2 million barrels in the week ended Oct. 17. A buildup in crude stockpiles often means that refineries have ample oil, and may not need to buy as much crude through the next week.
Supplies of motor gasoline rose by 2.7 million barrels, and supplies of distillates, which are used to make diesel fuel and home heating oil, increased by 2.2 million barrels.
Analysts polled by Platts, the energy research arm of McGraw Hill, had predicted a crude increase of 2.9 million barrels. Experts had also expected a 3 million barrel buildup in gasoline stockpiles, and a 600,000 barrel rise in distillate stocks.
Falling demand has helped drive oil prices down more than 50% since they rose to a record high of $147.27 a barrel in mid-July.
"Everybody pretty much realizes that the move of last August to the 4th of July - that's just speculation, that was just a bubble," said Steve Brassey, senior broker with Sonic Futures in California.
Gasoline prices have also fallen from a high of $4.114 a gallon on average, according to motorist group AAA.
By Wednesday, the average U.S. price had fallen to $2.858 a gallon, AAA said.
According to the Energy Department, gasoline consumption for the last four weeks averaged 8.8 million barrels a day, or 4.3% lower than the same period last year.
Stocks: Oil and commodity prices have been falling along with the stock market over the past several weeks.The Dow Jones industrial average was trading down more than 3% during Wednesday's session.
Investors and funds that had hedged against stock market losses by buying commodities, which usually counter one another, are being forced to sell their hedges, according to Brassey.
OPEC meeting: Though the U.S. inventory report was largely negative for oil prices, it may lead the Organization of Petroleum Exporting Countries to cut production deeper when it holds an emergency meeting scheduled for Friday, according to James Williams, energy economist with WTRG Economics in Arkansas.
OPEC, which controls about 40% of the world's oil, has expressed concern that record high oil prices, followed by global economic stagnation, may have permanently impaired demand for crude products.
Last week the organization moved up an emergency meeting by nearly a full month as oil prices plummeted. Experts had expected the organization to cut production by around 1 million barrels a day.
"You could make an argument that OPEC is probably going to cut more deeply in the wake of this report," said Williams.
"Iran, Venezuela and the traditional 'price hawks,' and even some (OPEC members) that are usually more neutral, have more ammunition going into this meeting," he added.
Dollar: As the global economy slowed, investors sought the stability of the dollar, which also contributed to lower oil prices.
The dollar gained strength Wednesday against major currencies such as the 15-nation euro and the British pound.
Oil, like other commodities, is traded in dollar terms. So when the value of the dollar goes up, it often means that the dollar-denominated price of crude falls.
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