By Dan Molinski and David Hodari 

Oil prices dropped sharply Wednesday as another large increase in U.S. oil inventories and volatility on Wall Street sparked concerns that global demand for oil is starting to retreat.

Light, sweet crude for November delivery fell 3% to end at $69.75 a barrel on the New York Mercantile Exchange as it snapped a three-session winning streak. Brent crude, the global benchmark, dropped 1.7% to $80.05 a barrel.

In recent weeks, U.S. oil prices surged to four-year highs above $76 a barrel due to persistent worries that U.S. oil sanctions on Iran that officially take effect next month are creating a much tighter oil market in which supplies are barely enough to satisfy strong demand.

But a sudden drop in U.S. stock markets last week and additional losses for much of the trading session Wednesday have begun to reverse that sentiment for many investors who now wonder if the global economy is facing a slowdown that could weaken demand for oil and leave the market oversupplied with crude.

Recent bearish data and reports from influential organizations such as the International Energy Agency that indicate supplies are normal despite Iran sanctions have further muddied the waters.

"The oil market is currently in a confusing position. Iran sanctions create fear of supply disruptions, yet the IEA says the market is adequately supplied right now," said Rob Haworth, a senior investment strategist at U.S. Bank Wealth Management. "The ultimate determinant of price will be whether global economic growth strengthens or begins to decline."

The key factor to oil's drop Wednesday was a bearish weekly report released by the government's Energy Information Administration in Washington.

The EIA said stockpiles of crude oil in the U.S. jumped by 6.5 million barrels last week to 416.4 million barrels, the highest total since late June. It also showed total U.S. inventories of oil and petroleum products such as gasoline rose to 1.26 billion barrels, the most in nearly one year.

Analysts were especially surprised by the build in oil inventories given Hurricane Michael had forced offshore oil producers in the Gulf of Mexico to halt more than a third of their oil production for several days last week for safety reasons. That led to wide speculation that oil inventories would see a counter-seasonal decline in this week's inventory data.

"Crude is getting clobbered on the back of a third consecutive chunky build to weekly inventories," said Matt Smith, director of commodity research at ClipperData. " A tick higher in refining activity and a drop in production due to hurricane activity in the Gulf was not enough to halt another climb in stocks -- and a solid one at that."

Beyond the data, however, analysts are noting a stronger link between oil prices and stock markets, a sign that investors may be turning more averse to riskier assets such as oil and other commodities.

"There's been a recent correlation between stocks and oil because the sentiment hitting equities markets has been reflecting concerns over the outlook for global growth," said Ole Hansen, head of commodity strategy at Saxo Bank.

Some analysts insist the longer-term view for oil prices is bullish since as much as 2 million barrels a day of Iranian oil exports could be removed from the global supply when U.S. sanctions on the country are applied next month.

Venezuela and Libya also present geopolitical risks to global oil supply, and even Saudi Arabia's promise to increase its own production to make up for the shortfall hasn't soothed investors, according to Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas.

"As much as the Saudis may increase production, we're still going to see accumulated losses, and that will put oil on a bullish footing," Mr. Tchilinguirian said. "As Saudi Arabia increases production, spare capacity is still dropping, so you can see why the market's still sensitive to potential supply shocks."

Riyadh's stated intention to bridge the gap left by Iran has been further complicated by the diplomatic storm surrounding the disappearance of dissident Saudi journalist Jamal Khashoggi.

Mr. Khashoggi's disappearance has strained U.S.-Saudi ties and sparked international outrage, but fears that Saudi Arabia could weaponize oil supply in response to hypothetical U.S. sanctions are as yet unfounded, Mr. Tchilinguirian said.

Among refined products, gasoline futures for November delivery dropped 3% to $1.9187 a gallon. Diesel futures fell 1.2%, to $2.3111 a gallon.

Write to Dan Molinski at Dan.Molinski@wsj.com and David Hodari at David.Hodari@dowjones.com

(END) Dow Jones Newswires

October 17, 2018 15:47 ET (19:47 GMT)