Oil Near $88 on Recession Concerns

Oil prices fell Wednesday as global stock markets plunged on fears of a U.S. recession, and ahead of a U.S. petroleum supply report expected to show crude supplies rose last week.

Financial markets were surprised by data in the United States that indicated the traditionally strong service sector shrank dramatically last month, raising the prospect that demand for energy will weaken along with the economy.

The Institute for Supply Management said its index of activity in the U.S. service sector, which makes up about two-thirds of the economy there, fell below 50, indicating contraction. Analysts had expected more growth in the sector, which had not contracted for nearly five years.

It was the latest in a series of reports that have stoked fears that the world's largest economy is nearing a recession.

Overnight, Wall Street declined sharply, pulling down major Asian stock markets Wednesday. In early trading, Hong Kong's benchmark index plunged more than 6 percent while Japan's Nikkei index fell more than 4 percent.

Energy investors often view stocks as a proxy for economic growth and worry that if economies slow or shrink, demand for oil and gasoline will as well.

Light, sweet crude for March delivery dropped 20 cents to $88.21 a barrel in Asian electronic trading on the New York Mercantile Exchange by midday in Singapore. The contract fell $1.61 to settle at $88.41 a barrel on Tuesday.

The U.S. Energy Department was to issue its weekly report on oil inventories later Wednesday. Crude supplies were forecast to have grown last week by 2.6 million barrels, according to the average estimate of analysts surveyed by Dow Jones Newswires.

Gasoline stockpiles were seen building 1.8 million barrels, while distillates, which include heating oil and diesel fuel, were seen falling 1.8 million barrels. Refinery use was seen falling 0.1 percentage point to 84.9 percent.

Heating oil prices fell 0.5 cent to $2.4415 a gallon while gasoline prices lost 1 cent to $2.2547 a gallon. Natural gas futures added 3.4 cents to $7.976 per 1,000 cubic feet.

Brent crude lost 22 cents to $88.60 a barrel on the ICE Futures exchange in London.