Oil in steepest two-day slide since 2004 as slowing demand fears grow

NEW YORK -- Oil prices dropped another 5% to a seven-month low on Tuesday, extending the steepest two-day slide since 2004 as mounting economic turmoil sent investors fleeing to safer havens.

The losses came despite U.S. supply disruptions after Hurricane Ike crashed through the Gulf of Mexico last week and left a quarter of the nation's energy output idled.

"People are getting out of commodities and getting into safer havens, like bonds," said Andy Lebow, broker at MF Global in New York.

U.S. crude for October settled down $4.56 at $91.15 a barrel, adding to losses of more than $5 on Monday. Prices have dropped about 10% in two days, the biggest slide since Dec. 2, 2004.

Brent crude fell $3.60 to $90.64 a barrel.

"If the economic turmoil continues, demand will continue to drop," said Jonathan Kornafel, Asia Director at U.S.-based options trader Hudson Capital Energy. "It's a bit of panic in the markets."

Monday marked the worst day on Wall Street since markets reopened after the Sept. 11 attacks in 2001, with investors fleeing to safer havens, such as gold and bonds, after news of Lehman Brothers' bankruptcy and the sale of Merrill Lynch.

Growing problems at insurer American International Group added to fears about the financial sector's stability and the outlook for the global economy.

Slowing demand in the United States and other top consumer nations has sent crude prices tumbling from record highs over $147 a barrel in July.

"If AIG tanks, that will be the big one. AIG has more to do with the oil price right now than the Saudis do," said Larry Grace, an analyst at Kim Eng Securities in Hong Kong.

Federal Reserve policymakers stopped short of lowering U.S. interest rates at a meeting on Tuesday, opting for the time being to soothe rattled financial markets with central bank lending facilities rather than rate cuts.

Oil prices dropped even as reports came in that Hurricane Ike toppled several oil and natural gas production platforms in the Gulf of Mexico, signaling that a full recovery of output from the region could be slow.