Oil drops over 2 percent as U.S. economy shrinks

NEW YORK (Reuters) – Oil fell more than 2 percent on Thursday as weak U.S. economic data stirred concerns demand could plummet further.

The U.S. economy shrank at an annual rate of 0.3 percent in the third quarter, the sharpest contraction in the world's largest economy for seven years. Businesses cut investment and consumers slashed spending at rates not seen for 28 years.

"The GDP numbers made traders rethink whether the economy was going to be strong enough to support oil demand," said Phil Flynn, analyst at Alaron Trading.

U.S. crude settled down $1.54 at $65.96 a barrel, after trading up to $70.60 earlier. London Brent crude settled $1.76 lower at $63.71.

Oil has more than halved its record high of $147.27 from July and is down 30 percent in October alone, on track for its biggest-ever monthly drop as the economic crisis continues to batter demand in the United States and other major consumers.

U.S. oil demand in August was revised down by 4.8 percent from the EIA's early estimate of 20.242 million bpd to the agency's final demand number of 19.267 million bpd, and was 8.4 percent less than demand of 21.035 million bpd a year earlier.

U.S. stocks gained on Thursday, buoyed by hopes that interest rate cuts by global central banks, including the U.S. Federal Reserve, will help stave off a prolonged downturn.

The U.S. Federal Reserve cut interest rates by half a percentage point on Wednesday, taking its target for overnight bank lending to 1 percent in an attempt to revive the sagging economy.

China also cut interest rates on Wednesday, kicking off what is expected to be a global round of rate cuts. Norway, Taiwan and Hong Kong have also cut rates.

The Fed cut pushed the dollar lower on Wednesday, making dollar-priced commodities like oil cheaper and more attractive for holders of other currencies. But the dollar rose on Thursday amid month-end book squaring by investors.

Oil drew some support from OPEC's decision last week to cut output by 1.5 million barrels per day, or about 5 percent, to prop up prices and hints that it might further reduce supply.

Nigeria's state oil company said in a statement it would reduce crude oil export volumes by 5 percent in November and December because of the OPEC cutback.

Members of the cartel have said they could cut output again to support prices.

Venezuelan Oil Minister Rafael Ramirez said on Thursday OPEC should cut oil output by 1 million barrels per day -- possibly before its next scheduled meeting in December -- and should set a minimum price target of $70 or $80 a barrel.