Oil fell more than four percent to below $57 a barrel today, its lowest level for 20 months, on expectations of weaker energy demand and as global stock markets headed downwards.
The fall in oil prices prompted OPEC officials to say they might decide to cut oil production further in an attempt to adjust the balance between output and demand.
US crude for December delivery hit a low of $56.73, down $2.60 and its lowest point since March 20, 2007, before rallying to $56.92 by 4.50 p.m. (Malta time).
London Brent crude shed $2.27 to $53.44 a barrel.
The bearish tone was set by the International Energy Agency, which said a slowing world economy may force it to cut further its forecast for oil demand growth when it releases its latest monthly report tomorrow.
Turmoil in the world's financial markets has already led the IEA, which advises many of the biggest economies on energy policy, to cut its assumption for 2008 world oil demand growth to the lowest rate in 15 years at just 440,000 barrels per day.
The head of the IEA said the agency had to take into account the changing view of the global economy.
"We are likely to cut demand ... because the IMF changed its projections on the world economy very dramatically," Nobuo Tanaka told Reuters.
The IEA comment reinforced fears among traders and analysts that the ferocity of the recession sweeping through many of the world's biggest economies has not yet been fully factored into projections for oil demand.
Gloom over the state of the economy was underlined by a lower opening on Wall Street, where the Dow Jones industrial average slipped 1.95 percent or almost 170 points before recovering to 8,578.79 by 4.30 p.m. (Malta time).
"Fear global recession is worsening day by day is driving this market down," said Rob Laughlin, senior oil analyst at MF Global. "Demand for oil is deteriorating week by week."
He said crude oil prices could well head down towards $50 before finding a floor, something that could spur the Organization of the Petroleum Exporting Countries into further trimming oil production.
OPEC President Chakib Khelil said on Wednesday the group could cut oil supplies for a second time since October if prices continued to fall and the world economy weakened further.
"If the prices continue their decline most probably OPEC will have to take a further decision on a cut in supply," Khelil, who is also Algerian Energy and Mines Minister, told Reuters in an interview in Algiers.
The remarks follow other calls from OPEC countries for action to stem the oil price slide, which will reduce their revenues from oil sales and make domestic spending programmes harder to finance.
OPEC agreed last month to cut production by 1.5 million bpd from Nov. 1 after the sharp fall in oil prices.
Oil demand forecasts are in the process of being adjusted in the light of new economic data.
Credit Suisse said in a note the US Department of Energy would probably cut its one-year US crude price forecast when its publishes its Short Term Energy Outlook tomorrow.
Frederic Lasserre, an analyst at Societe Generale in Paris, said stock markets rather than supply and demand fundamentals would probably tell the oil market where the floor would be.
"The signal is going to come from equity markets," he said. "There is an extremely high correlation between equities and commodities."
US weekly oil inventory data was expected to show an 800,000-barrel rise in crude stocks last week as demand continues to slow, a Reuters poll of analysts found.
The data will be released tomorrow, a day later than usual due to the US Veterans' Day holiday yesterday.