Oil fell nearly $3 as concerns about financial market turmoil increased after talks between US lawmakers over a bailout package to mop up toxic debt stalled.
The $700 billion deal to rescue the faltering US financial system hit a wall on Thursday amid bickering between Democrats and Republicans.
“The general direction of the market is heading downwards because the economic sentiment and economic outlook are weak,” said John Vautrain, an energy analyst at Purvin & Gertz in Singapore.
“It is a very volatile time and the market will get more and more jittery each day the US rescue plan gets delayed.”
Oil prices have dropped from record highs over $147 a barrel struck in July as the mounting economic crisis and high fuel costs hurt demand in the United States and other developed economies.
Further pressure has come as investors - who flocked into oil and other commodities earlier this year as a hedge against inflation and the weak dollar - shift into safer havens.
News that Washington Mutual was closed by US authorities and its assets sold in America's biggest-ever bank failure also rattled financial markets.
Oil has found some support from supply disruptions in the US Gulf of Mexico, home to a quarter of US crude production, caused by Hurricane Ike.
The International Energy Agency said on Thursday if did not need to release emergency stocks to help bolster supplies, however, even though nearly 60% of the region's output remained shut.
“We don't have to mobilize,” IEA Executive Director Nobuo Tanaka said. “The market is now taking care of the current situation.” (Reuters)