Oil rallies from 3-1/2-year low (Reuters)

NEW YORK (Reuters) –

Oil rose slightly on Friday, after falling more than 7 percent the day before, as stock markets recovered from early lows caused by continuing economic gloom.

U.S. crude rose 32 cents to $49.74 a barrel at 13:41 p.m. EST, after dropping as low as $48.25, the lowest level in 3-1/2 years. London Brent crude gained 98 cents to $49.06 a barrel.

U.S. stocks recovered slightly after falling into negative territory on Friday as shares of financials, including Citigroup (C.N), declined and investors worried about the deepening economic slump.

Further support came as the dollar fell against a basket of other currencies. A weaker dollar makes oil cheaper for holders of other currencies and tends to support prices.

"Crude is up as the stock market is bouncing and refined products are moving up, particularly heating oil, on cold weather," said Phil Flynn, an analyst at Alaron Trading, Chicago

"Prices of other major commodities such as gold and silver are up and the dollar is down, which is also supportive."

Slumping demand in the United States and other top oil-consuming nations has sent crude prices plunging from record highs above $147 a barrel in mid-July.

On Thursday, oil fell more than 7 percent on gloomy economic data, to settle at its lowest since May 2005.

JP Morgan said on Friday it expected world oil demand in 2009 to decline by 500,000 barrels per day as the global credit crunch continues to rack the world economy.

Members of the Organization of the Petroleum Exporting Countries will meet in Cairo next week, but may not take any decision to reduce output to defend prices.

"In Cairo we will not have the complete data about the market," OPEC President Chakib Khelil said. "It's very possible that we will not take a decision until we will see the impact. This impact will not likely be seen until December."

OPEC will meet on December 17 in Oran, Algeria.

Industry consultant Petrologistics estimated OPEC oil production will fall by 1.22 million barrels per day in November.

OPEC agreed in October to cut output by 1.5 million barrels per day from November 1, but the move has failed to stem the decline in oil prices.

(Additional reporting by Jane Merriman in London and Annika Breidthardt in Singapore; Editing by David Gregorio)

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