Crude oil prices struggled to remain above $60 a barrel with West Texas Intermediate tanking 4.3% to $61.07 a barrel after a large increase in oil imports contributed to oversupply in domestic crude oil inventories for the week, according to the Energy Information Administration. Earlier Wednesday, OPEC warned that demand for oil in 2015 would hit 28.9 million barrels a day, its lowest point in 12 years.
The energy sector was dragging on benchmark indices with the Dow Jones Industrial Average down 1.4%, or 255 points, and the S&P 500 falling 1.5%, the benchmark indices' worst drop since Oct. 9. The Nasdaq slid 1.6%. The VolatilityIndex (VIX) spiked 22.3%.
"Historically at least, energy stocks have tended to lead the market," Kingsview Asset Management's Paul Nolte told CNBC. "We're now six months into oil underperforming the overall market, so we may be in for some rough sledding."
Small-cap Goodrich Petroleum(GDP) - Get Report and Oasis Petroleum(OAS) - Get Report slid after separately announcing plans to cut 2015 capital expenditures in half. Oil companies have been reassessing future projects in light of tumbling oil prices. Earlier in the week, ConocoPhillips(COP) - Get Report announced it was cutting its 2015 capex budget by 20%.
Airlines enjoyed a fresh rally as the drop in gasoline prices fueled investor appetite for the sector. American Airlines(AAL) - Get Report , Delta Air Lines(DAL) - Get Report , United Continental(UAL) - Get Report , JetBlue(JBLU) - Get Report and Virgin America (VA) were all higher.
Hopes are high that low gas prices will fuel consumer spending, a segment of the economy that contributes more than two-thirds of GDP.
"While energy prices are capturing a lot of attention, to a large degree it's a holiday-sales-driven market and frankly the results so far have been mixed," said U.S. Bank's Terry Sandven in a call. "The average price of regular gasoline in the U.S. is $2.67, 59 cents below year-ago levels so that's a big drop and clearly bolsters consumer sentiment, and should assist with discretionary spending as well."
Retail sales data will be released Thursday morning. Economists expect an increase of 0.4% in November compared to a rise of 0.3% a month earlier.
Investors were also skittish ahead of the Federal Reserve's monthly meeting next week, particularly whether any indication will be given as to when it could raise interest rates.
"People had started to shift their expectations out to the latter half of 2015 [for a hike], but the good data on employment and especially on the earnings ... really moved people's opinions on what the Fed's going to do," EverBank Wealth Management's Chris Gaffney said in a call. "It's not necessarily a good thing for markets in that the Fed may be coming to an interest rate increase sooner rather than later now."
Disney(DIS) - Get Report was dragging on the Dow, down 1%, after Topeka Capital Markets downgraded the stock to a "hold" on a valuation call and after raising concerns a stronger dollar could deter global tourists from domestic parks.
Telecom companies Sprint (S) - Get Report and AT&T (T) - Get Report continued to sell off after Verizon (VZ) - Get Report warned of margin pressure and higher disconnects in its fourth quarter a day earlier.
-- Written by Keris Alison Lahiff in New York.