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Oil Drops Below $88 as Stock Markets Resume Fall

Oil fell below $88 a barrel on Wednesday as stock markets declined further, shrugging off a temporary reprieve from Tuesday's steep cut in U.S. interest rates amid persistent fears of a global economic slowdown.

Oil Refinery
Oil Refinery

U.S. light, sweet crude for March fell, after hitting a low of $86.11 in the previous session amid a global stock market rout. London's Brent crude traded lower.

Some analysts said funds and speculators have been exiting open positions in oil and other commodities to cover margin calls and finance losses in equity markets.

"I think a lot of people realise the underlying weakness of the economy is still unfolding... traders feel that there are lots more losses still waiting to be revealed," said Robert Nunan, manager at Mitsubishi Corp's risk management unit.

Oil had plunged on Monday and Tuesday, as world stock markets posted their steepest losses since Sept. 11, 2001 amid widespread concerns that the impact from the U.S. credit and housing crisis could trigger a recession, curbing the steady rise in oil demand that has fuelled prices for five years.

Analysts said commodity markets were still holding up relatively well as the underlying economic momentum, especially in Asia, was still 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.

Oil Still Strong

While down almost 12 percent from their all-time peak above $100 a barrel hit Jan. 3, oil prices are still up more than 60 percent from a year ago, supported by tight inventory levels, OPEC output restraints and strong demand from investors seeking higher returns and a possible hedge against inflation.

Goldman Sachs said that while oil prices could slide into the low $80s if speculators liquidated their long positions, strong fundamentals would probably prevent funds from selling out completely.

U.S. crude oil stocks, which rose for the first time in nine weeks last week after hitting their lowest since 2004, are expected to have risen by another 2.1 million barrels last week, a preliminary Reuters poll found.

U.S. government inventory data, due out a day later than usual on Thursday due to Monday's U.S. holiday, are also likely to show a 1.4 million-barrel rise in gasoline stocks as refiners begin to build up supplies ahead of summer, the poll showed.

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