Oil Falls to $86 as World Markets Plunge

Oil prices fell below $87 a barrel Wednesday in Asia on investor concerns that the credit crisis that began in the U.S. will trigger a prolonged global economic slowdown and hurt crude demand.

Light, sweet crude for November delivery was down $3.26 to $86.80 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore. The contract overnight rose $2.25 to settle at $90.06.

A $700 billion U.S. financial bailout plan approved last Friday has failed to soothe investors worried about a deepening economic malaise. The Dow Jones industrial average fell more than 500 points Tuesday to a five-year low.

The crisis has spread to Europe as well. The British government announced plans Wednesday to partially nationalize its major banks. The Treasury said eight banks have signed up for the so-called recapitalization plan that offers up to $87.5 billion in the form of preference shares.

Asian shares were hammered hard Wednesday, with the Japan's benchmark Nikkei 225 stock average spiraling down nearly 10 percent to a five-year low. Hong Kong's market plunged 8 percent.

"We've got major issues in every corner of the planet," said Peter McGuire, managing director at investment firm Commodity Warrants Australia in Sydney. "The world economy is like a house that's been ravaged by termites."

Investors are watching for signs of slowing U.S. demand in the weekly oil inventories report to be released later Wednesday from the U.S. Energy Department's Energy Information Administration. The petroleum supply report was expected to show that oil stocks fell 1 million barrels, according to the average of analysts' estimates in a survey by energy information provider Platts.

The Platts survey also showed that analysts projected gasoline inventories rose 2 million barrels and distillates went up 1 million barrels last week.

The Organization of Petroleum Exporting Countries may cut production if prices fall further, but the scope of such cuts would be limited by concern higher energy costs would exacerbate the economic slowdown, McGuire said.

"OPEC can only do so much," McGuire said. "We may see interest rates cuts and increased government spending as a way out."

Oil prices have fallen about 40 percent since peaking near $150 in July.

The Reserve Bank of Australia surprised markets Tuesday when it slashed its key rate a full percentage point to 6 percent its biggest cut since 1992.

In other Nymex trading, heating oil futures fell 4.24 cents to $2.46 a gallon, while gasoline prices dropped 4.28 cents to $2.02 a gallon. Natural gas for November delivery fell 9.3 cents to $6.67 per 1,000 cubic feet.

In London, November Brent crude fell $3.04 to $81.65 a barrel on the ICE Futures exchange.