SAN FRANCISCO (MarketWatch) - Crude futures closed at their lowest level in eight months Monday, as concerns over the health of the global economy and a historic drop in the U.S. stock market pushed prices for crude below the $88-per-barrel level.

"As the financial and economic crisis spreads, oil prices continue to trade on the bad economic news," said James Williams, economist at WTRG Economics. "Buying oil futures is like trying to catch a falling knife."

“ 'Buying oil futures is like trying to catch a falling knife.' ” — James Williams, WTRG Economics

Crude for November delivery closed at $87.81 per barrel on the New York Mercantile Exchange, down $6.07, or 6.5%. It traded as low as $87.80. Prices haven't seen levels this low since Feb. 7.

Year to date, crude futures are down 8.5% after closing at $95.98 at the end of last year.

In electronic trading on Globex, however, November crude climbed back up to $89.45 as of 3:30 p.m. EDT.

Crude prices tested support at the $87 level and are going through a "recovery rally" in electronic trading, said Darin Newsom, DTN senior analyst. The climb is "not that surprising given the magnitude of Monday's selloff."

Other energy futures closed sharply lower on Nymex Monday, with natural gas losing 7.1%.

During Monday's regular trading session, oil prices continued their decline "with pessimism still haunting global markets and investors still pulling money out of commodities," said Andrey Kryuchenkov, analyst at Sucden Research, in a note.

"Fears that global economic activity is slowing down have captivated markets in the past weeks and until equities start consolidating or until we see some positive economic data, volatility is likely to persist," he said.

Last week, crude futures ended with a loss of more than 12%.

Traders have been worrying in recent months that a slowdown in global economic growth will lead to a sharp slowdown in demand for oil.

Woes spread

The unprecedented crisis for European banks deepened severely over the weekend, leading to new rescue packages for a pair of institutions as Germany joined the roster of countries to guarantee bank deposits. Read more.

And on Monday, Asian markets dived, with most indexes falling 4% or more. See Asia Markets.

"It is now clear that that Asia and China in particular is not insulated from the problems of the West," Williams said in emailed comments. "That means lower demand for construction materials and the energy that is used in their manufacture and transportation."

The Dow Jones Industrial Average dropped as much as 800 points Monday, to fall below the 10,000 mark for the first time in nearly four years. See Market Snapshot.

Last Friday, Congress granted final approval for a revised $700 billion financial-rescue plan. President Bush signed the measure into law. See full story.

But the law itself might "not be enough to unlock the credit markets, which is what is needed for a real improvement in economic outlook, and thus oil demand," said Rachel Ziemba, analyst at RGE Monitor.

"The underlying weakness in the U.S. economy as evidence by record job losses, still falling housing prices, mean that the $700 billion may not be enough as buying the assets at today's fair value would leave the banks undercapitalized," she said in recently emailed comments.

In currency trading, the dollar made gains at the expense of the euro, which plunged after a weekend meeting of European Union leaders failed to produce a consensus on how to deal with renewed banking-sector turmoil. See Currencies.

The U.S. financial-rescue plan "will take time to work, if it does work," said Thomas Hartmann, an analyst at Altavest Worldwide Trading, in emailed comments. "In the mean time, businesses will still face trouble securing credit and the general public will remain fearful, causing spending to slow and inventories to drop."

Too fast, too far

But the prices seen in the oil markets last week had "more to do with an overall correction of the oil markets, which started months ago, than with the legislative events," said Bob Tull, managing director at MacroMarkets.

In the last year, the price of oil had increased dramatically, spiking atop $147 a barrel on July 11, he said in emailed comments. And in the last three months, oil futures prices have fallen below $100, though that's still above where they were two years ago, he said.

This correction has been "due to the 'bursting' of the oil bubble," he said.

Oil actually rallied "under false pretenses" earlier this year, said Phil Flynn, a vice president at Alaron Trading. Traders thought it might be a safe haven away from the credit crisis, and the assumption was that it was a U.S. problem, the dollar would remain weak and global demand for oil would remain strong, he said.

Ziemba said oil prices rose too far and too fast earlier this year -- and went beyond the level dictated by fundamentals.

"Oil's fall came as part of a broader reassessment of the global, not just U.S., outlook and recognition that global demand growth for oil would be lower than expected," she said.

Still, there may be a floor for oil prices around $75 to $80, "given the marginal costs of production," she said.

Elsewhere on Nymex Monday, prices for petroleum products followed crude prices lower.

November reformulated gasoline fell 16.9 cents, or 7.6%, to close at $2.0591 a gallon and November heating oil dropped 18.8 cents, or 7.1%, to finish at $2.474 a gallon.

Natural gas sinks

But natural gas was the biggest loser in the energy sector Monday.

November natural gas closed 7.1% lower, down 52.3 cents at $6.835 per million British thermal units on Nymex. Natural-gas futures haven't fallen below $7 since last December.

"Just three months ago we were paying $14 [per million British thermal units] for natural gas," said Ben Smith, president of First Enercast Financial. "Those high prices put domestic production into overdrive."

Total natural gas supply this year is almost 3 billion cubic feet per day higher than last year, he said. And "once you factor in current expectations of mild weather and a weakening economy, it appears that supply will easily surpass demand."

On Thursday, the U.S. Energy Information Administration reported an 87 billion-cubic-foot climb in natural-gas supplies in storage for the week ended Sept. 26.

The supply increase came even with 3.4 billion cubic feet per day offline in the Gulf of Mexico because of Hurricane Ike, said WTRG's Williams. "If that had been produced, it would have added another 24 BCF to storage."

Also on the commodity markets, gold futures closed 4% higher as investors sought a safe haven amid the global financial crisis. See Metals Stocks.

Corn futures dropped more than 6%. See Food Futures.