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Oil prices fell more than 5 per cent yesterday, the biggest slide since December 2004, as concern about the US economy rippled through financial and commodity markets.
The slide added to hefty losses on Friday following a report showing weaker-than-expected job growth in the United States, the world's
biggest oil consumer, and another which showed slowing growth in the service sector.
"The macro picture does not look good," said Nauman Barakat, senior vice- president at Macquarie Futures USA. "The sub-prime crisis is also spilling over into the commodities sector, and in particular the energy."
US crude tumbled US$3.42 to US$72.06 a barrel before extending losses in electronic trade to US$3.88, or more than 5 per cent. It was the biggest fall since December 27, 2004, when an unusual warm spell undercut US heating demand.
London Brent lost US$3.58 to US$71.17 a barrel.
The slump reverses crude's rally to an all-time high last week of US$78.77 a barrel, supported by worries that rising global demand and continued Opec cuts could cause a supply crunch later this year.
"Crude futures are down today on concerns about economic growth," said Kyle Cooper, energy analyst at IAF Advisors in Houston. "With no bullish development over the weekend, it developed into a one-two punch that hit crude, which has been overpriced lately."
Markets were being hit by the prospect that the borrowing that drives the financial system will either become prohibitively expensive or dry up completely as a result of risk repricing.
This began with difficulties and losses in the US sub-prime - or risky - mortgage business and has spread to other areas. An economic downturn could slow world demand growth for energy.
Dealers added that speculators that had ridden oil's rally to a peak may also be taking profits. Speculative net long positions in the US crude oil market soared to record highs in recent weeks.
"I think we're seeing some liquidating of that length," said Cooper.
Oil remains sharply up from about US$50 in January due to real and threatened disruptions to crude oil supply, constraints at oil refineries, resilient demand and a flow of investor money into commodities.
The reluctance of the Organisation of the Petroleum Exporting Countries (Opec), which began curbing supply late last year, to increase crude output has limited price declines.
Opec, source of more than a third of the world's oil, meets on September 11 to set production policy. Some officials have said the exporter group does not need to increase supplies. The longer the group keeps a lid on shipments, the greater the chance of a further rally in prices, Goldman Sachs said.
- Reuters
