Oil fell to a six-week low on Tuesday, dragged lower by a stock market plunge and fears a slowdown in the United States could have a much wider impact than previously thought.
Speculative funds have begun to sell positions in oil markets and other commodities as they readjust portfolios, analysts said.
US crude fell to a low of $86.11 a barrel, its weakest since December 6 and by 11.13am GMT was trading at $87.31.
The level was down $3.26 from Friday's settlement. There was no settlement on Monday as floor trading was closed for a US public holiday.
London Brent crude fell $1.32 to $86.19 a barrel.
"There's a lot of fear out there. That could make some market participants go into cash until the situation becomes clearer," said Mike Wittner of Societe Generale.
The sell-off has taken oil prices below a range of roughly $90-$100 a barrel sustained since late October.
Stocks recovered slightly in European trade on Tuesday after world stock markets on Monday suffered their deepest losses since September 11 2001.
But traders were nervously awaiting the opening of US markets, which were closed on Monday.
Goldman Sachs said if all speculative length were liquidated on the oil markets, prices could drop to the low $80s, but fundamentals of supply and demand would probably prevent funds from selling out completely.
"Fundamentals continue to show little sign of weakness and suggest that the recent sell-off is overdone," Goldman Sachs wrote in a note.
Inventory data in top consumer the United States last week showed the first increase in oil stocks for nine weeks, but Goldman Sachs said stores of refined products in industrialised countries were still relatively low.
Concerns about political instability in oil-producing countries like Nigeria were also expected to provide support for oil prices.
Oil has fallen around 13 per cent from its record high of $100.09 hit on January 3, relieving pressure on the Organization of the Petroleum Exporting Countries (OPEC) to agree a production increase when it meets on February 1.
But the producer group is not expected to cut output while the world is smarting from the impact of high oil prices and economic uncertainty makes it extremely difficult to predict oil demand.
"With mounting evidence of a slowdown in US economic expansion at year-end, fears of a downright recession have multiplied," OPEC said on Tuesday in a monthly report. (Reuters)
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