Oil prices have resumed their downward trend today, pulled lower by weaker global stock markets and a sharp contraction in China's manufacturing activity, with the US benchmark on track for its longest weekly losing streak since 1986.

Activity in China's factory sector shrank at its fastest pace in almost 6-1/2 years in August as domestic and export demand dwindled, adding to worries about lower demand for crude in the world's second biggest oil consumer.

Asian stocks fell this morning, following Wall Street down as fears took hold of a China-led deceleration in global growth.

Key oil benchmarks were trading near 6-1/2 year lows, with the U.S benchmark headed for its eighth straight weekly decline.

In late 1985, oil prices slumped to $10 from around $30 over five months as OPEC raised output to regain market share following an increase in non-OPEC production.

US crude for October delivery was 59 cents lower at $40.73 a barrel at 3.28am GMT. The September contract, which expired yesterday, ended 34 cents higher. The US benchmark hit a 6-1/2 year low of $40.21 a barrel.

Brent was on track for its seventh weekly decline in the past eight, trading 56 cents lower at $46.06 a barrel, after settling 54 cents lower yesterday.

The dollar continued retreating on shrinking expectations of an US interest rate hike in September, providing some support for oil prices.

US crude inventories continued to rise last week, as imports rose and shale production fell slower than anticipated, despite falling prices. 

"The only silver lining we are seeing coming from the United States is that refining rates remain high and that crude production continues to fall," Singapore-based Philip Futures said in a note to clients.

Despite the rout in oil prices, some mutual funds keep ploughing money into oil exploration and production companies in the United States in a bet that production will retreat sharply over the next 12 months, setting the stage for a rebound towards $65-70 per barrel.

A glut of US oil is about to repeat itself north of the border, with traders scrambling to secure more storage space in western Canada as crude stockpiles surge to record highs.

Spot prices of Western Canada Select, a marker for heavy, diluted bitumen from Alberta's oil sands sank to a 12-year low near $20 per barrel.