Oil futures finished sharply lower Wednesday, with the U.S. benchmark registering its sharpest daily slump in about 13 months as fears of flagging demand and renewed production from Libya overshadowed a report showing the biggest weekly drop in domestic crude supplies in nearly two years.

August West Texas Intermediate crude US:CLQ8, the U.S. benchmark, fell $3.73, or 5%, to $70.38 a barrel on the New York Mercantile Exchange—its lowest finish since June 25. The drop marked the worst percentage decline for a most-active contract since June 7 of 2017 and the steepest fall on a dollar basis since Sept. 1 of 2015, according to WSJ Market Data Group.

September Brent crude UK:LCOU8, meanwhile, dropped $5.46, or 6.9%, to $73.40 a barrel on London’s ICE Futures exchange, marking its lowest settlement since June 21. That also represented the international benchmark’s sharpest percentage fall in a single session since a Feb. 9 of 2016 and the steepest decline on a point basis since Nov. 28, 2013.

Read:The 7 reasons behind U.S. oil’s sharpest daily point drop in almost 3 years

“Market players are taking profits after reports of the return of Libyan crude oil,” possible waivers for U.S. sanctions on Iranian oil and renewed trade war fears, said Phil Flynn, senior market analyst at Price Futures Group.

There is also speculation that U.S. President Donald Trump “will hammer Russia on raising oil production” in an effort to push prices lower, and that has “traders running for cover,” he said.

The losses come even as the Energy Information Administration reported Wednesday that domestic crude supplies plunged by 12.6 million barrels for the week ended July 6.

“The biggest draw since September 2016 should be a wake up call for the U.S.," said Flynn. “We are in a tightening supply situation that is not going to get better soon.” The EIA reported a climb in crude supplies last week, but that followed three-consecutive weeks of hefty declines.

The size of the supply drop was more than double the 4.8 million-barrel decline expected by analysts surveyed by S&P Global Platts and the American Petroleum Institute on Tuesday reported had reported a smaller drop of 6.8 million barrels.

James Williams, energy economist at WTRG Economics, pointed out that U.S. imports dropped by 1.6 million barrels a day, “which accounts for 11.4 million barrels of the drop in stocks” last week. He said part of the import decline was due to the continued output halt at the Syncrude Canada facility.

Gasoline stockpiles fell by 700,000 barrels for the week, but distillate stockpiles jumped 4.1 million barrels higher for the week, according to the EIA. The S&P Global Platts survey forecast a supply decrease of 1 million barrels for gasoline and a rise of 1.7 million barrels for distillate stocks.

On Nymex, August gasoline US:RBQ8 fell 4.6%, or 9.89 cents, to $2.0614 a gallon, marking its sharpest session decline since Sept. 1, 2017. August heating oil US:HOQ8 shed 12.1 cents, or 5.5%, to $2.1008 a gallon. The most severe one-day drop for heating oil on a percentage basis since July 13, 2016.

Meanwhile, Libya’s state-run National Oil Corp. lifted force majeure on eastern oil ports on Wednesday after the ports were handed back from an armed faction, paving the way for a resumption of full production.

“Resumption of exports from Libya trumps one week of bullish EIA data,” said Williams. “That reduces fear of shortages with so little spare production capacity worldwide.”

Bjornar Tonhaugen, vice president for oil markets at consultancy Rystad Energy AS, estimated that around 700,000 barrels of oil a day would eventually be returned to the global market from Libya.

Meanwhile, trade tensions between the U.S. and China also caught investors’ attention after the U.S. said Tuesday that additional tariffs were being considered on Chinese goods. The U.S. last week launched tariffs on $34 billion worth of Chinese exports to America.

“If the U.S. implements this additional tax on $200 billion of imported Chinese goods, it will be difficult for China not to impose greater taxes on commodities imported from the U.S.,” said Olivier Jakob, head of energy consultancy Petromatrix.

China was the second-largest importer of U.S. crude in the first quarter of the year, according to data published by the EIA. As yet, China hasn’t imposed tariffs on U.S. crude.

In a monthly report released Wednesday, the Organization of the Petroleum Exporting Countries said oil production from its 15 members, which now includes the Republic of the Congo, averaged 32.33 million barrels a day in June, up 173,000 barrels a day from a month earlier, OPEC said, citing secondary sources.

Rounding out energy action, August natural gas US:NGQ18 settled at $2.829 per million British thermal units, up 4.1 cents, or 1.5%, ahead of Thursday’s EIA update on U.S. supplies of the fuel.

—Mark DeCambre contributed to this article