Oil falls more than $2 on fear of U.S. slowdown

By Robert Campbell

NEW YORK (Reuters) - Oil fell more than $2 on Thursday, erasing half of Wednesday's gains as fears over the health of the U.S. economy outweighed concerns over tight fuel supplies.

The drop came as stock markets fell sharply amid doubts over a new coordinated attempt by global central banks to unfreeze credit markets unveiled yesterday.

U.S. light sweet crude futures settled down $2.14 at $92.25 a barrel, after slumping as low as $91.85. London Brent crude settled down $1.90 at $92.12 a barrel.

"Potential contagion from a rapidly decelerating U.S. economy into emerging markets poses significant downside risks to oil prices in (the second half of) 2008," Francisco Blanch, head of global commodity research at Merrill Lynch, said in a research report.

Fears that the problems in credit markets could push the United States into a recession have roiled financial markets in recent weeks. But tight global supplies and continued strong economic growth in developing nations such as China have supported oil prices.

Oil jumped nearly 5 percent on Wednesday after the U.S. Federal Reserve and other major central banks announced fresh measures aimed at restoring confidence to world credit markets, which have been shaken by tens of billions of dollars in losses on U.S. mortgage securities.

"The battle between those that think demand will be lower and those concerned about tight supplies continues," said Mike Fitzpatrick, vice president at MF Global.

Oil hit a record $99.29 on November 21, boosted by a weak dollar and concerns over shrinking crude supplies ahead of winter. Prices have fallen back sharply since then to touch a six-week low last week of $85.82 a barrel.