Oil prices plunged below $130 a barrel yesterday, extending a sharp three-day decline and fuelling a second day of big gains in stocks that lifted Wall Street out of bear market territory. The continued fall in oil, which last week reached a record high of $147.27, combined with the rally in bank stocks to brighten what a few days ago looked like an increasingly bleak financial and economic outlook. The slide in the oil price raises the possibility that oil might have peaked. Many oil traders were sceptical, warning that the oil market was highly volatile, trading volumes were thin and prices could swiftly rebound. If sustained, the $18 decline in oil from its high could improve the prospects for the world economy, easing pressure on incomes and prices. That would reduce the risk of "stagflation" - the combination of sustained weak growth and high inflation. At a minimum it would provide extra breathing space for central banks caught between slower economic growth and fast-rising prices pushed up by prior oil and commodity price gains. The drop came hours after the International Monetary Fund warned emerging economies to make fighting inflation their "top priority". It marked up its second-half growth forecast for the US slightly, but said it still expected the economy to contract in the six-month period, amid a broad slowing in global growth. Oil had seemed immune to talk of weaker growth. But a downbeat assessment by Ben Bernanke, the Federal Reserve chairman, on Tuesday and hopes of easing tension between the US and Iran, a big oil producer, appear to have at least temporarily taken the wind out of prices. US crude fell to an intraday low of $129.00 a barrel before closing $5.31 lower at $129.29, its lowest level in six weeks. Natural gas prices fell 7.5 per cent. "It is capitulation day," said Ed Meir, an oil analyst at MF Global in New York. He said falling prices were reflecting weakening US oil demand and improving global supply, thanks to Saudi Arabia's decision last month to boost its output to the highest level since 1981. Other traders were still cautious about calling the top of the oil market, having made calls in the past three months after similar price plunges only to see oil prices march higher later. Paul Horsnell of Barclays Capital in London said: "Prices have been volatile but ultimately directionless in the past month."