OIL prices ended the week with a modest rally yesterday but couldn't erase one ugly October: Crude capped its biggest monthly drop since futures trading began 25 years ago, weighed down as a deflated US economy crushes demand for fuel.

Oil's huge collapse -- prices fell 32 percent for the month -- has stunned oil-producing countries while giving cash-strapped US consumers a rare dose of relief. Pump prices have fallen by about 40 percent since their summer peak above $4 a gallon, a drop that's expected to result in staggering annual savings for American households -- well in excess of $100 billion.

"That's a pretty powerful stimulus to consumers," said Adam Sieminski, chief energy economist at Deutsche Bank Global Markets in Washington.

After trading lower most of the day, oil prices staged a late-session surge on the back of a Wall Street rally. Oil investors have been tracking equity indexes as a barometer of global economic health. The Dow Jones industrial average rose 144 points.

Light, sweet crude for December delivery rose $1.85 to settle at $67.81 a barrel on the New York Mercantile Exchange, after earlier falling as low as $63.12.

Prices closed at $100.64 a barrel on the last trading day in September. That gives oil the biggest monthly slide since the launch of the Nymex crude futures contract in 1983. The previous record was a 30 percent drop set in February 1986.

Crude hit a record price of $147.27 set on July 11.

"We're seeing a huge paradigm shift," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Illinois. "We went from $100 at the beginning of the month to around $65 today. It's quite a decline and shows how weak the demand picture really is."

In August, Americans drove 15 billion fewer miles (24 billion fewer kilometers) than they had in the same month the previous year, the largest single month decline since World War II, when figures were first collected regularly.

Cheaper gas has been a rare bit of good news for consumers rattled by huge drops in the stock market, rising mortgage payments and difficulty in obtaining credit. According to Deutsche Bank research, for every dollar that comes off pump prices, US households save a staggering $100 billion a year -- money that can be spent on other goods and services to help jolt the economy.

Deutsche Bank estimates that the $100 billion would be worth 3 million new jobs.

But even with cheaper energy, Deutsche Bank's Sieminski predicts the weak global economy will weigh on fuel demand well into 2009 -- bringing oil to a quarterly average of $50 a barrel for that year.

OPEC and international energy agencies earlier this year predicted oil demand would rise by 800,000 barrels a day next year, driven by growth from developing economies like China and India.

Given the widening economic downturn, Sieminski said those figures now seem wildly optimistic.
U.S. gross domestic product, the broadest barometer of a nation's economic health, shrank at a 0.3 percent annual rate in the July-September quarter, the Commerce Department said Thursday.

It marked the worst showing for the world's largest economy since it contracted at a 1.4 percent pace in the third quarter of 2001.

"We believe there will be no growth in oil demand in 2009, and we may even see a decline," Sieminski said.

The drop in oil has come despite moves by OPEC to prop up prices. Last week, the Organization of the Petroleum Exporting Countries announced plans to cut 1.5 million barrels of production per day at an extraordinary meeting in Vienna.

Venezuela's Oil Minister Rafael Ramirez says OPEC, which controls about 40 percent of world crude oil production, will need to cut production by at least another 1 million barrels per day to boost falling prices.

Analyst believe oil price hawks like Venezuela and Iran need prices at near $100 a barrel to balance their national budgets, while Saudi Arabia and other members would like to see prices stabilize at around $80.

Opinion, however, is mixed on whether all members of the cartel will follow through on the cuts -- or keep churning out as much crude as they can on fears that prices will plummet more.

"A further fall in the oil price cannot be ruled out. It is difficult to predict where the bottom could be," said David Moore, commodity strategist with Commonwealth Bank of Australia in Sydney. "An important factor over the next few months will be whether OPEC can achieve its output cuts. If it can that will certainly tighten market conditions."

In London, Brent crude fell $1.61 to settle at $65.32 a barrel on the ICE Futures exchange.