Oil dives $4, hammered for second day by bank woes

LONDON (Reuters) - Oil fell over 4 percent to a seven-month low on Tuesday, sliding for a second day as Lehman Brothers' collapse raised concern the credit crisis will hurt the economy and undermine fuel demand.

Reports that Hurricane Ike caused minor damage to U.S. oil platforms and refineries also weighed on the market, adding to the previous session's decline of more than $5.

"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."

U.S. crude for October which fell as much as $4.17, was down $3.41 at $92.30 a barrel by 4:26 a.m. EDT. The market has fallen over 37 percent from the record high of $147.27 reached in July.

Brent crude for November fell $3.36 to $90.88 a barrel at the same time, having slumped by as much as $4.44 to touch the lowest price for a nearby month since February 8.

On Monday, Wall Street had its worst day since markets reopened after the September 11 attacks, with investors fleeing to safer havens such as gold.

Lehman Brothers' bankruptcy, the sale of Merrill Lynch and the struggle of American International Group stirred fears about the financial sector's stability and the outlook for the global economy.

"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.

Following oil's sharp losses, analysts who use chart patterns to predict future direction were focusing on support below $90 a barrel and into the $85 to $80 a barrel region for the next leg lower.

Also pressuring oil were expectations that U.S. oil platforms and refineries escaped with limited damage from Hurricane Ike.

A large part of U.S. energy production shut by the storm could restart within a week as initial reports showed it caused only minor damage to the nation's oil platforms and refineries.

Oil's drop came despite renewed concern about supply in Nigeria, where militants attacked a Royal Dutch Shell oil pipeline and Chevron-operated oilfield, militants and security sources said on Tuesday.

(Reporting by Tom Miles in Hong Kong and Annika Breidthardt in Singapore, editing by William Hardy)