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Oil price drops amid financial turmoil

Oil prices fell below $88 a barrel on Thursday in Asia on investor fears that crude demand will weaken as turmoil in the financial system pushes economies in the United States and Europe into recession.

Light, sweet crude for November delivery was down $1,22 to $87,73 a barrel in electronic trading on the New York Mercantile Exchange by mid-afternoon in Singapore. The contract overnight fell $1,11 to settle at $88,95.

The US Federal Reserve, along with central banks in Europe and China cut interest rates on Wednesday in a bid to jump-start lending. But markets in the US and Europe sank in response. The Dow Jones industrial average lost another 2%, and the index has shed more than one-third of its value since its all-time high set one year ago on Thursday.

”Traders are expecting the world to move toward recession, with the US and Europe especially a concern,” said Gerard Rigby, an energy analyst with Fuel First Consulting in Sydney. ”Based on the short-term trend, you could see prices approaching $80 next week.”

Weighing on prices was evidence of falling demand in the US, where crude inventories jumped by 8,1-million barrels last week while petrol stocks surged by 7,2-million barrels, the Energy Information Administration (EIA) said on Wednesday in its weekly inventory report.

Both increases far exceeded expectations, reflecting both persistently weak demand and a recovery of Gulf Coast energy output following shutdowns prompted by Hurricane Ike last month.

Meanwhile, demand for petrol over the four weeks ended October 3 was 5,3% lower than a year earlier, averaging nearly 8,8-million barrels a day, according to the EIA report.

Crude has fallen about 40% since surging to an all-time record $147,27 a barrel on July 11.

”The bubble has burst,” Rigby said. ”Before any real increase in prices, we need to see some good economic data from around the world, and that could be a few months.”

Prices were supported by speculation that the Organisation of the Petroleum Exporting Countries (Opec) may cut output to keep prices from falling too far. Venezuelan President Hugo Chávez said on Wednesday that some Opec members want an extraordinary meeting before the group’s December 17 meeting in Algeria.

Opec’s decision last month to cut production by 520 000 barrels a day failed to halt oil’s slide.

”I think Opec will definitely start to talk the market up,” Rigby said. ”They’ll try to keep their members to their quotas. Then, if prices fall below $80, they may cut production.”

In London, November Brent crude fell by 85 cents to $83,51 a barrel on the ICE Futures exchange. — Sapa-AP

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