Updated from 1:08 p.m. EST

Oil prices plummeted Monday as growing domestic inventories and reduced demand forecasts outweighed supply problems in Nigeria and Iran.

April crude closed down $2.35, or nearly 4%, to $60.42 per barrel on Nymex, erasing all of its gains from last week. The decline was the largest in a single trading day since Aug. 17.

"Crude markets are, for the most part, still trapped in a rather inconclusive tug of war between the bulls and bears," said Edward Meir, an energy analyst at Man Financial in Darien, Conn.

Last week, OPEC and the International Energy Agency, which advises 26 industrialized nations on energy issues, revised its estimates of world crude demand. The Organization of the Petroleum Exporting Countries shaved its estimate for world demand by 100,000 barrels to an average of 84.5 million barrels a day, while the IEA cut its forecast by 340,000 barrels to 84.74 million a day. Both groups slashed their estimates because high crude prices have reduced the world's appetite for oil.

Lower demand was coming in the midst of soaring U.S. crude supplies, which are at seven-year highs, the Energy Department reported last week. Stockpiles jumped 4.8 million barrels to 339.9 million barrels due to seasonal refinery maintenance for the week ended March 10. Crude, which is processed into heating oil and distillates, has been building up at refineries.

Supplies likely rose 2.4 million barrels last week, according to a Bloomberg survey of analysts, because of sluggish demand and low spot prices. Crude demand is lower because most of the winter heating season is over and the peak driving season has yet to begin. Since the start of the year, inventories have climbed nearly 7%.

When spot prices are lower than futures prices, a situation traders call "contango," refiners typically buy crude on the spot market rather than draw on supplies. Crude for May delivery closed at $61.96 and June crude finished at $63.06.

Bulging inventories and lower demand have outweighed supply problems in Nigeria and the possibility of economic sanctions against Iran. Over the weekend, rebels blew up Italian oil company ENI's pipeline in Nigeria's oil-rich Niger delta in their continuing campaign to gain a share of the country's oil wealth and to destabilize the central government. The attack cut 13,000 barrels of oil per day in a pipeline that typically carries 75,000 barrels of crude per day. Overall, rebel activity has cut Nigeria's daily oil production by 25% to 1.6 million barrels.

Meanwhile, members of the U.N. Security Council were meeting Monday to discuss Iran's nuclear ambitions. Iran restarted uranium enrichment to generate more electricity for its growing population; the West fears Tehran wants to build nuclear weapons. The U.N. Security Council has been discussing what measures to take against OPEC's second-largest crude producer, including a trade embargo. In the event of economic sanctions, oil prices would likely rise as world supplies tightened even further.

Rising gasoline prices, which are up 15% this month, have helped prop up crude prices. Futures of unleaded gasoline settled at $1.83 a gallon, down 3 cents on the Nymex.

Refiners are phasing out MTBE, a gasoline additive linked to water pollution, by May and are reducing the amount of gasoline with MTBE they produce. The onset of the spring driving season and declining stockpiles, which are slightly above last year, are also helping keep gasoline prices high. Traders are concerned there won't be enough gasoline this summer when demand is at its highest.

Retail gasoline rose 3 cents to an average of $2.36 a gallon last week and is expected to clear $2.50 a gallon this summer, according to the Energy Department.

"Gas prices have not hindered the consumer," said John Person, president of National Futures Advisory Service in Palm Beach, Fla. "They're still driving and planning Easter vacations."

An unseasonably warm winter, which boosted stockpiles to record levels, have driven down prices of heating oil and natural gas. Both are used to heat companies and homes. Heating oil inched down 4 cents to $1.74 a gallon, while natural gas dipped 21 cents to $6.83 per million British thermal units.

There is 31% more natural gas in storage than last year and 13% more distillates than a year ago, more than enough to ride out any cold weather. Distillates include heating oil.

In trading Monday, shares of the multinational oil giants were down, with Chevron ( CVX) lost 42 cents to $56.76; ExxonMobil ( XOM) fell 59 cents to $60.46; Total ( TOT) dipped $1.14 to $128.91; ConocoPhillips ( COP) was down $1.05 to $60.31. BP ( BP) was declined 82 cents to $68.71, and Shell ( RDS-A) was down 91 cents to $61.33.

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