Oil prices tumbled around 5 percent on Tuesday as the deepening global economic crisis dragged down markets and raised expectations energy demand will slow further.
U.S. stocks tumbled as aluminum maker Alcoa set production cuts and amid fears of a cash drain at automaker General Motors and signs the Chinese economy was faltering.
U.S. light, sweet crude fell $3.08, or 4.9 percent, to settle at $59.33 a barrel after touching $58.32, its lowest since March 2007.
London Brent crude also traded lower.
Economists slashed oil demand expectations due to the economic slowdown in top consumer the United States and Europe.
Some said total global oil demand could contract next year.
"The oil market is coming down into line with demand expectations,'' said Simon Wardell, oil analyst at Global Insight in London. "There's more downside weakness here than upside strength. We are expecting prices to go lower before they go higher with U.S. crude hitting $50 before its reaches $65 again.''
Slumping demand has knocked crude off record highs over $147 a barrel struck in July as demand from big consumer nations drops, after surging demand from emerging markets like China sent commodities on a six-year rally.
Concern about the economy of China, the world's No. 2 oil consumer, after customs data showed import growth slowed in October.
Oil prices jumped 2 percent Monday after China announced a $600 billion economic stimulus plan.
"I think people got a little carried away yesterday with the Chinese fiscal package and the impact it may have on oil prices and after a morning rally reality set in,'' said Robert Laughlin at MF Global in a research note on Tuesday.
More From CNBC.com ...
An OPEC source said the cartel may cut oil output by a further 1 million barrels per day when it meets next month in Algeria because of slowing world demand.
OPEC agreed last month to cut production by 1.5 million bpd from Nov. 1 after the sharp fall in oil prices.
U.S. weekly inventory data was expected to show an 800,000 barrel rise in crude stocks last week as demand continues to slow, according to a Reuters poll of analysts.
Distillate stocks should rise by 500,000 barrels and gasoline by 800,000 barrels, according to the poll. The data will be released on Thursday this week, a day later than usual due to Tuesday's national holiday.