Oil drops more than 3 percent on global recession fears

NEW YORK (Reuters) - Oil prices dropped more than 3 percent on Monday to the lowest level in nearly 22 months as Japan became the latest major economy to fall into recession, stoking concerns that global fuel demand will fall further.

Worries about the global economy mounted after Citigroup (C.N) said it would cut 52,000 jobs. A Philadelphia Federal Reserve survey showed the U.S. economy fell into recession last spring and forecast it would contract sharply this quarter.

U.S. crude settled down $2.09 at $54.95 a barrel, the lowest settlement since January 29, 2007 as slumping demand sent crude further below record highs over $147 a barrel struck in July.

London Brent crude fell $1.93 to settle at $52.31 a barrel.

"The stock market is easing off and that has caused crude to fall off too," said Phil Flynn, an analyst for Alaron Trading in Chicago. "Earlier news about the Saudi supertanker hijacking caused a pop in prices, but now demand considerations are taking hold again."

Somali pirates captured a fully laden Saudi supertanker far off East Africa, seizing the biggest vessel ever hijacked, with a cargo of oil worth more than $100 million.

Japan surprised markets with data showing the world's second-biggest economy fell into its first recession in seven years as the financial crisis curbed demand for Japanese exports.

U.S. stocks slipped on the grim economic news, while debt prices reflected an aversion to risk.

"The dour outlook for the economy, which has affected the global capital markets, continues to be a pile-driving force on energy markets," John Kilduff, senior vice president at MF Global, wrote in a note.

The Organization of Petroleum Exporting Countries became the latest industry group to cut its 2009 global demand forecast, adding to signs the producer group could cut production further to stem the price drop.

Since early September OPEC has agreed to remove around 2 million barrels per day from oil markets, and several OPEC members want more cuts. Iran is calling for another 1 million to 1.5 million bpd in output cuts.

OPEC has not yet called a full-blown policy meeting for the Cairo gathering of Arab oil ministers on November 29. OPEC's next regularly scheduled meeting will take place in December.

Kuwait's oil minister said OPEC could decide to cut supplies at the Cairo meeting but was more likely to wait until the December 17 meeting in Algeria.

"I think prices are on a fast track down," Kuwaiti Oil Minister Mohammad al-Olaim told Reuters.

"So ministers have to take that into consideration (in Cairo). More probably the decision to keep supplies unchanged, or to cut, will be taken in Algeria. The Cairo meeting will be a consultative meeting."

A Reuters poll of analysts ahead of weekly U.S. government inventory data due out on Wednesday forecast a 900,000 barrel rise in crude inventories in the week to November 14. Distillate stocks were seen rising by 300,000 barrels and gasoline stocks by 900,000 barrels.

(Additional reporting by Robert Gibbons, Gene Ramos in New York; David Sheppard, Christopher Johnson in London; Fayen Wong in Perth; Editing by David Gregorio)