Oil tumbled more than 2 percent to a three-month low below $87 a barrel on Wednesday amid persistent worries of a recession in top energy consumer the United States. US crude settled down $2.22 to $86.99 a barrel, the lowest settlement since October 23. London Brent crude fell $1.83 to $86.62 a barrel.
Oil has lost more than $3 so far this week as world stock markets posted losses amid widespread concern that the US credit and housing crisis could trigger a recession and crimp oil demand growth. Some analysts said funds and speculators may be selling off positions in oil and commodities to cover margin calls and finance losses in equity markets.
The Dow and the S&P 500 rose late Wednesday, rebounding from earlier losses of more than 2 percent each, as investors bought back shares they had bet against and the banking sector gained.
"Oil markets shrugged off yesterday's unexpected (Federal Reserve cut) and focused again on fears of a global economic slowdown and forecasts for growing inventory levels," Addison Armstrong, analyst at TFS Energy, wrote in a research note. But experts said commodity markets were holding up relatively well as underlying economic momentum, especially in Asia, remained supportive. "Oil's ability to go down another $10 to $15 from here really depends upon a deteriorating outlook for the economy. We are not going to go down $15 unless the economic outlook starts to look pretty bad," said Francisco Blanch, head of commodity research at Merrill Lynch.
While US oil is down almost 13 percent from the all-time peak above $100 a barrel hit January 3, prices remained up more than 60 percent from year-ago levels. Tight inventory levels, Opec production restraints and strong demand from investors seeking higher returns and a possible hedge against inflation supported oil on its surge. Qatar's oil minister on Wednesday said Opec did not need to boost output when it meets on February 1 to determine production policy, adding he was concerned about how a possible recession would affect demand.
Earlier this month, US President George W. Bush called on Opec to ramp up production to help drive down prices. But members of the producer group have insisted that oil markets are well supplied and that speculators have been pushing prices to record levels.
Goldman Sachs said prices could slide into the low $80s if speculators liquidated long positions, but added that strong fundamentals probably would keep funds from selling out completely. A Reuters poll of analysts forecast US weekly government oil inventory data to be released on Thursday would show a 2.2 million barrel gain. Distillates stocks were forecast to show a 100,000 barrel draw, while gasoline stocks were expected to have risen by 1.4 million barrels.
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