Oil drops $1 as stock markets retreat

NEW YORK (Reuters) - Oil prices fell more than $1 to below $39 a barrel on Monday as investors worried about the weak economy and Wall Street stocks dropped.

U.S. front-month crude fell $1.29 to $38.74 by 1:26 p.m. EST (6:27 p.m. British time). London Brent crude dropped 78 cents to $41.11 a barrel.

“Overall, the weakness in the economy is still what’s dictating direction for oil prices,” said Phil Flynn, an analyst at Alaron Trading in Chicago.

U.S. stocks dropped, dragged by falling technology shares and uncertainty about the government’s latest plans to rescue banks.

The economic crisis has hit global oil demand and pushed prices down by more than $100 a barrel since last July’s peak, prompting OPEC to make a series of production cuts totalling 4.2 million barrels per day (bpd) since September.

Oil rose early in the day after Petrologistics reported that OPEC’s February output should fall near its target for cutting production.

OPEC oil supply was expected to drop sharply in February, Petrologistics told Reuters.

OPEC’s 11 members with output targets were expected to pump 25.32 million bpd in February, down 980,000 bpd from January levels and giving a compliance rate of 89 percent, according to Reuters calculations.

The producer group should decide on a new production cut at its next meeting scheduled in March, Algerian Energy and Mines Minister Chakib Khelil said at the weekend.

Financial markets also will watch Federal Reserve Chairman Ben Bernanke’s policy report to the U.S. Congress on Tuesday and Wednesday. He is expected to offer clues on further steps being mulled to fight the recession.

Reporting by Christopher Johnson and Barbara Lewis in London and Fayen Wong in Perth; editing by James Jukwey