The price of oil fell 12% Wednesday, the biggest decline in more than seven years, following the release of a report that showed U.S. oil and product inventories increased dramatically last week, a reality that means demand is clearly much weaker than previously forecasted.

Light, sweet crude for February delivery closed down $5.95 to $42.63 a barrel on the New York Mercantile Exchange. It was the biggest decline since Sept. 24, 2001.

Oil prices were already down $1.78 a barrel prior to release of the report. The early decline was based on more bad news related to the U.S. economy, specifically lousy employment numbers.

Then the U.S. Energy Information Administration reported oil inventories jumped by 6.7 million barrels, far more than analyst forecasts of 700,000 barrels, and the bottom fell out.

Consider that supplies at Cushing, Okla., the Nymex contract’s delivery point, have surged to a record 32.2 million barrels.

Product inventories also grew by far more than expected, with gasoline stocks rising by 3.3 million barrels. That’s compared to forecasts of 600,000 barrels. Distillate stocks, including heating oil and diesel, rose by 1.8 million barrels, two times the 900,000 barrels forecasted.

The numbers made clear that weak demand did not go out with 2008, and that oil inventories have continued to rise despite significant cuts in production by the Organization of Petroleum Exporting Countries.

“We're seeing the market once again succumb to its economic wounds,” Matt Zeman, president of trading at LaSalle Futures in Chicago, told The Wall Street Journal. “The concern about demand in the coming year is just so great that prices are having a very hard time sustaining any rallies at all at this point.”

Oil prices had risen 25% between Dec. 30 and Jan. 5, but ended slightly lower on Tuesday. Oil no longer seems headed to $50 a barrel. This despite worries that Israel’s offensive against Hamas in Gaza could spark retaliation from Iran, or that European countries will switch over to oil-based fuels as Russia restricts natural gas exports.

The price of oil has now fallen 55% from a year ago.