Oil plunges to 5 1/2-year low, Asian shares sink on opening

TOKYO (Reuters) - Oil prices fell sank more than two per cent to 5 1/2-year lows early on Monday on concerns about supply glut and slower global growth, feeding fears for energy and commodities producers and exporters.

Investors are nervous after U.S. shares posted their biggest weekly fall in 2 1/2-years last week on losses led by energy sector and as they expect the U.S. Federal Reserve to hint this week it is getting closer to raising interest rates.

U.S. crude futures fell more than 2.5 per cent at one point to as low as US$56.25 per barrel in quiet early Monday Asian trade, showing no sign of life even after fall of almost 50 per cent from its peak in June.

The world's energy watchdog late last week forecast even lower prices next year on weaker demand and increased supply, sparking a fresh waving of selling.

Oil's relentless slide pounded energy stocks and currencies exposed to crude exports on Friday, doused the appetite for riskier assets.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.5 per cent to lowest level since March in early trade as resource-heavy Australian shares fell 1.0 per cent.

Japan's Nikkei share average fell 1.4 per cent, drawing little momentum from Japanese Prime Minister Shinzo Abe's big election victory, which was a boost for his reflationary economic policies.

Energy-exporting emerging markets were strained, with the Brazilian currency hitting 9 1/2-year low and the Russian rouble hitting all-time low.

Falls in risk asset prices are pushing investors into the safety of government debt and other traditional safe havens such as the yen.

The US dollar fell 0.8 per cent to 117.90 yen, edging near two-week low of a 117.445 hit last week.

The yen cut gains slightly after the Bank of Japan's tankan corporate sentiment survey showed business sentiment at big manufacturers declined in December.

The dollar's index against a basket of six other major currencies slipped about 0.2 per cent to 88.169, moving further away from a 5 1/2-year high of 89.550 hit a week ago.

"The risk-off sentiment may support the yen against the dollar in the next couple of days though I do think the market will become bullish on the dollar after the Fed's meeting," said Osao Iizuka, chief dealer at Sumitomo Mitsui Trust Bank.

Improving U.S. economic data has added to bets that the Federal Reserve is moving closer to raising interest rates next year.

Many investors expect that the U.S. central bank may change its vow to keep interest rates near zero for a "considerable time" when it meets at a two-day policy meeting starting on Tuesday.