"We're awfully close to $40, and it certainly feels like it wants to test the lows we saw earlier this year," said Andrew Lipow, president of Lipow Oil Associates. Gasoline was also sharply lower, with RBB down 4 percent at $1.27 per gallon.

West Texas Intermediate crude futures was down 2.75 percent at $41.75 per barrel. WTI set an intraday low of $37.75 on Aug. 24. Brent crude was down nearly 3 percent Thursday at $45.23 per barrel.

"The realization of a mega-glut is finally registering within the market," said John Kilduff, analyst and partner with Again Capital. "I think we're probably in the midst of another leg lower here. It might not go straight down but we're on target to make new lows for the year."

Oil prices are getting crushed and could retest August's lows as global oversupply shows few signs of abating soon.

Oil futures are down more than 10 percent in the past month and took another leg lower this week on American Petroleum Institute reports of more U.S. supply. The U.S. government reported Thursday that oil stockpiles rose by 4.2 million barrels last week due to higher imports. That was about four times what analysts had expected.

"This raft of poor economic data out of China all week speaks to more slowing there and a slack demand picture," said Kilduff. "There's the expectation of renewed dollar strength, and even with the significant cut in rig count, you had another slight uptick in U.S. production."

"All commodities are selling off. We don't think this price is sustainable, and we think that oil is bottoming in this range but there's a lot of volatility in the market and concerns about China, and the Fed's going to raise rates, and the dollar strengthening. It's all playing a part," said Michael Cohen, head of energy commodities research at Barclays. "Aside from that, from a fundamental perspective, the market continues to have this perception that we are oversupplied. The data continues to show builds, so it's kind of confirming the market's bias."



U.S. production last week totaled 9.2 million barrels a day, slightly higher than the weekly totals reported in the past month. The U.S. imported 7.4 million barrels a day, up 400,000 barrels from the previous week.



"It's been our view that we may have a few more bumps in the road before (oil prices) start recovering," said Citigroup energy analyst Eric Lee. "Inventories in the U.S. are really ticking up a lot more. Right now, we have cargoes coming in as well from Iraq and from across the Atlantic into the U.S. There's a big migration of oversupplied barrels into U.S. storage. The Gulf Coast storage tanks are pushing barrels back up into Cushing."

Cushing, Okla. is the physical hub for NYMEX crude futures, and traders have been concerned that it will reach capacity, driving more cheap oil back into the market.

"Over these few months into the beginning of next year, our view has been that you could see WTI in the high $30s and Brent in the low $40s. We're just about on the cusp of that level," said Lee.

OPEC's comments also added to supply concerns when it reported Thursday its current output could result in a daily global surplus of more than 500,000 barrels next year. In its monthly report, OPEC said it produced 31.38 million barrels per day in October, down 256,000 barrels from September and the first decline since March.



Read MoreWhy stocks are ready for a pullback

The organization also said it expects non-OPEC production to fall by about 130,000 barrels a day next year after growing by 720,000 barrels a day this year. OPEC meets in early December, but analysts expect it to take no action and maintain its position that the market should set prices.

Cohen said while there has been some decline in U.S. oil and traditional drilling on shore because of lower prices, the offshore production in the U.S. has increased by 200,000 barrels a day in the Gulf of Mexico. He expects on-shore production to drop by 300,000 barrels a day next year.



Cohen said if oil returns to its lows, it won't stay there for long, and he sees a more balanced supply picture next year.



"The difference now compared to the last time we touched those levels was the supply side of the equation is adjusting. One thing we see as a justification for a rebound next year is not demand driven," he said.



Cohen said even though he said oil's current level is not sustainable, there are risks to the downside. He said negatives include if El Nino conditions create very warm weather this winter or if Libyan production ramps up or Iranian supply exceeds expectations. "The final thing is if we do see the kind of macro correction we saw in August 2015 again, which we do think is possible, then that could drag oil down," he said.



Kilduff said if El Nino does produce unusually warm weather through December and January, oil could take another leg down in late January or February.

As oil dropped, the whole energy complex has gone with it. Lipow said the decline in gasoline futures Thursday comes as refineries appear to be back on line after maintenance.

"The cash market on the Gulf Coast has collapsed over the last three days, indicating the return of refining units," he said. Spot gasoline prices in the Houston market were about $1.14 per gallon Thursday, he said.

"There's a significant amount of oil parked outside of Houston waiting to unload or waiting to be sold," he said.