Oil drops, biggest weekly slide since May

Oil prices fell on Friday, with US crude slumping to a four-month low under USD 93 as a dimmer economic outlook and the European debt crisis drove crude to its biggest weekly loss since early May.

US futures fell more than USD 3 a barrel as momentum sellers piled into the slide. US crude's discount to Brent widened by more than USD 1 to USD 19.90 a barrel.

Oil broke away from familiar correlations, diving in tandem with the dollar and despite gains for many commodities. Some oil analysts appeared more pessimistic about Greece than those in the foreign exchange market, where the dollar fell by nearly 1% on hopes for a debt deal.

US crude futures for July settled at USD 93.01 a barrel, down USD 1.94, or 2.04%, its lowest since the Feb. 18. It traded from USD 91.84 to USD 95.40 Friday. US crude fell below the 200-day moving average for the first time since September, drawing additional selling.

Brent crude for August settled at USD 113.21 a barrel, dropping 81 cents, or 0.71%, the lowest settlement since May 24, when front-month Brent closed at USD 112.53. Trading volume was about 20% below the 30-day average.

For the week, front-month Brent fell 4.7%, the biggest weekly loss since the week to May 6. Brent is up 19% this year, while US futures are up less than 2% as the European market rose to a record premium.

"The predominant problem here is that traders own too much oil. They bought too much in anticipation of market tightness and now they have to adjust their positions," said Tim Evans of Citi Futures Perspective.

The current July contract for US crude is set to expire on Tuesday, June 21. Prices slumped early in the European day, and made new lows in mid-afternoon as a downturn in stocks following Research In Motion's disappointing results weighed.

"The stock market and euro have come off a bit and that has added pressure on oil and some sell stops have been triggered. People just continue to be nervous about the economy," said Phillip Streible, senior market strategist at Lind-Waldock.

Greek drama 

The euro gained on the day as the embattled Greek prime minister sacrificed his finance minister to force through an unpopular austerity plan, while Germany and France promised to go on funding Athens.

The euro pared those gains slightly in the afternoon when Moody's Investors Service said it may cut Italy's sovereign credit rating from AA2, citing challenges ahead for economic growth due to structural weaknesses and a likely rise in interest rates.

Oil's slump broke its inverse correlation with the dollar, which has eased to its weakest since mid-April at just 22%, based on the average of the past 25 days.

"US crude has broken below the recent range of USD 95-105 and looks like it will shortly tack another USD 5 to the downside," said Gene McGillian, analyst at Tradition Energy.

"The fear of the fallout from the Greek debt crisis continues to impact the oil markets. Indications of a possible resolution of the crisis have helped pare some of oil's losses but investors worry about the stalling pace of US economic recovery."

The International Monetary Fund cut its estimate for US gross domestic product. This also weighed on US crude prices. The IMF now projects an anemic 2.5% growth this year and 2.7% in 2012.

Brent was also under pressure from news that this week's relative strength for the European benchmark was drawing physical crude from far afield, with news that traders were offering Russian Pacific Rim ESPO in the Mediterranean.

Data from the Commodity Futures Trading Commision that showed large hedge funds and other speculators raised their net long US crude futures and options positions slightly in the week to June 14.