Oil prices drop as US recession fears spark broader selloff

By Paul Carsten

London (Reuters) -Oil futures extended losses in a volatile session on Monday as fears of a recession in top oil consumer the United States offset supply worries stemming from mounting tensions in the Middle East, the world's largest oil producing region.

Share markets also tumbled across Asia as U.S. recession fears sent investors rushing from risk assets while wagering that rapid rate cuts will be needed to drive economic growth.

Brent crude futures dropped 53 cents, or 0.7%, to $76.28 a barrel by 0819 GMT. U.S. West Texas Intermediate crude futures were down 57 cents, or 0.6%, at $72.95.

Brent and WTI tumbled more than 3% on Friday, with both contracts marking their fourth straight week of losses - the biggest losing streaks since November.

U.S. recession concerns stoked by Friday's weak July payrolls report "only add to Chinese demand concerns that have been lingering in the oil market for some time", ING analysts led by Warren Patterson said in a note.

Slumping diesel consumption in China, the world's biggest contributor to oil demand growth, is weighing on oil prices.

Oil also came under pressure from a decision by the OPEC+ group of producers to stick to its plan to phase out voluntary output cuts from October, which means that supplies will rise later this year, analyst say.

OPEC oil output rose in July despite production cuts by the group, a Reuters survey showed on Friday.

However, oil losses were capped by geopolitical risks in the Middle East. Fighting in Gaza continued on Sunday, a day after an unsuccessful round of ceasefire talks in Cairo.

Israel and the United States are bracing for a serious escalation in the region after Iran and its allies Hamas and Hezbollah pledged to retaliate against Israel for the killings of Hamas's leader and a top Hezbollah military commander last week.

"The risk of a wider regional war, while I still think is small, can't be ignored," said Sydney-based IG market analyst Tony Sycamore.

Investors are also awaiting U.S. services data for last month to gauge the health of the world's largest economy, Sycamore said.

"Another fall tonight and it supports the idea the Fed is behind the curve," he said, referring to the U.S. central bank's delays to interest rate cuts.

(Reporting by Paul Carsten in London and Florence Tan in SingaporeEditing by David Goodman)