Oil heads for 12% weekly drop as recovery falters

US crude fell below USD 83 on Friday, heading for its biggest weekly drop since early May, as fears of a global economic slowdown drive investors to the exits in a commodities selloff that has erased the benchmark's 2011 price gains.

Brent has dropped nearly 11% and US oil by about 12% this week as concern grows that the world's largest economy is sliding back into recession, putting oil demand growth at risk. Europe's escalating debt crisis also threatens to engulf Italy and Spain, two of the region's top economies.

US crude plunged as much as USD 3.76 to USD 82.87 a barrel, the lowest price since Nov. 26. It was down at USD 84.90 by 0736 GMT, after plunging almost 6% on Thursday, the biggest daily drop since May 5.

Brent fell as much as USD 2.95 to USD 104.30, its lowest since June 27, after dropping almost USD 6 in the previous session, and traded at USD 106.52.

Traders are now awaiting US employment data due later in the day for the latest indication on the health of the economy, after disappointing manufacturing and consumer spending numbers earlier this week.

"People should be very nervous, and they should think that oil demand will be less than expectations," said Tetsu Emori, a fund manager at Tokyo-based Astmax Co Ltd.

"Even if today's employment numbers are better than expected, the markets probably need much more to recover. As soon as (Fed Chairman) Ben Bernanke appears, that will be a very positive sign. People are waiting for more quantitative easing."

French President Nicolas Sarkozy will discuss financial markets with German Chancellor Angela Merkel and Spanish Prime Minister Jose Luis Rodriguez Zapatero, Sarkozy's office said in a statement, as Thursday's rout also signalled fear Europe's debt crisis is spinning out of control.

The announcement came as Australia's Treasurer Wayne Swan said the nation was well equipped, should there be a re-run of the 2009 financial crisis, becoming one of the first leaders to comment on such a step in the latest turmoil.

The benchmark 19-commodity Reuters-Jefferies index, fell 2.8% on Thursday, its biggest one-day decline since May 11.

In other markets, Asian stocks tumbled as much as 5% on Friday, the day after the worst sell-off on Wall Street since the global financial crisis.

"The US economy appears headed for a double dip recession," said Monty Guild, chief executive officer of Guild Investment Management.

"Even though we expect weak economic activity will lead to more money printing from central banks, the markets are going through a rugged period, which makes us want to reduce our exposure" to oil, Guild said.

Demand slowdown

Barclays Capital, one of the most bullish on oil prices, now sees slower global demand growth this year. In a report to be published in the next few days, the bank sees global oil demand increasing by 1.1 million barrels per day (bpd) this year, down from a previous forecast of 1.56 million bpd.

US gasoline futures led oil's slump on Thursday after stockpile data added to evidence that expensive fuel and a weak economy have reduced demand in the world's top user.

As crude broke out of a trading range it held for weeks, implied volatility in the options market spiked to the highest since the May 5 meltdown across commodities market. The Oil VIX index, a measure of volatility based on NYMEX options, surged more than 26%on Thursday.