Oil futures sunk to a one-year low Friday morning as a spiraling financial crisis weighed on global demand expectations.

The benchmark oil contract settled lower by $8.89 to $77.70 a barrel as the International Energy Administration warned increased financial and economic trauma would cut into global demand for oil.

Oil prices have fallen roughly 47% since reaching a record $147.27 on July 11.

“The oil market is dreary,” said Fadel Gheit, managing director and senior analyst covering the oil and gas sector for Oppenheimer & Co.

Gheit cited two key reasons for oil’s recent downturn.  For one thing, the financial crisis is going to put incredible pressure on global economies, which is bound to substantially constrain demand for oil, he said.

Secondly, many hedge funds and investment banks that bet oil would rise are hemorrhaging capital as oil plunges, he said.  These companies are being forced to sell contracts to recover cash and to cover margin calls, causing a multiplier effect that is further depressing oil prices. 

“When oil prices are coming down, people are trying to cover their losses as quickly as they can, that’s why they are selling everything,” Gheit said.

The IEA’s monthly oil report that came out today paints a gloomy picture for global oil demand for the rest of the year and into 2009. 

The IEA cut its projection for oil demand this year by 240,000 barrels per day, and slashed its 2009 forecast by 440,000 barrels per day. The energy watchdog now projects world oil demand to total 86.5 million barrels per day this year and 87.2 million barrels per day next year.

The credit crunch is also expected to take a toll on crude supply: "Credit shortages are rapidly becoming yet another in a long line of impediments to industry investment," the report said.

Taken together the IEA report, and other technical factors, it appears there could be substantial downward pressure on oil prices. 

“Oil prices are still artificially high. When the dust settles oil prices shouldn’t be a dime above $60,” Gheit said.

Lower oil prices could mean good news for drivers, who were forced to pay record prices at the pump during summer months. 

The average price for a gallon of regular gasoline is $3.35 nationwide, compared with the record $4.11 on July 17, according to the AAA's Daily Fuel Gauge Report.  Still, there is a long way to go -- drivers paid just $2.76 for regular gasoline just a year ago.