Oil fell 5 percent to $56 a barrel on Wednesday as the U.S. government hacked its global demand growth forecast again due to the slumping global economy.
OPEC officials, concerned about the oil's steep drop from record highs over $147 a barrel per day (bpd) in July, said the cartel could possibly decide by the end of the month to cut production again to raise prices.
U.S. crude fell $3.17 to settle at $56.16 a barrel, the lowest settlement since January 29, 2007. London Brent crude traded down $3.34 to settle at $52.37 a barrel.
The U.S. Energy Information Administration chopped its 2009 output outlook by 740,000 bpd, with total demand expected to average 85.93 million bpd next year, compared with estimates of 85.89 million bpd for this year.
Demand in the United States, the world's biggest consumer of oil, was expected to fall by more than 1 million bpd for the first time since 1980 this year, the EIA said.
Earlier, the International Energy Agency, which advises many of the biggest economies on energy policy, said a slowing world economy may force it to cut its oil demand forecast again when it releases its latest monthly report on Thursday.
The economic crisis had already led the IEA, to cut its assumption for 2008 world oil demand growth to the lowest rate in 15 years at just 440,000 barrels per day.
"We are likely to cut demand ... because the IMF changed its projections on the world economy very dramatically," Nobuo Tanaka, head of the IEA, 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.
U.S. stocks extended losses on Wednesday after U.S. Treasury Secretary Henry Paulson said his department would consider capital needs of non-bank financial institutions, renewing concerns about the scope of problems in the U.S. economy.
"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."