Oil heads for 10% weekly drop, biggest since May

US crude fell below $86 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 by nearly 9 percent and US oil by about 10 percent this week as concern grows that the world's largest economy is sliding back into recession, putting growth in oil demand at risk. Europe's escalating debt crisis also threatens to engulf Italy and Spain, two of the region's top countries.
US crude fell by as much as $1.40 to $85.23 a barrel, the lowest price since Feb. 17. It was down $1.08 at $85.55 at 0437 GMT, after plunging almost 6 percent on Thursday, the biggest daily drop since May 5. Brent was unchanged at $107.25, after dropping almost $6 in the previous session.
"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."
Guild recommended oil investors to take profits.
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 Thusrday'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.
Commodities continued their slide, extending the rout. Asian stocks tumbled as much as 5 percent after the worst selloff on Wall Street since the global financial crisis.
Traders are now awaiting U.S. nonfarm payrolls data due on Friday, expected to show an increase of 85,000.

DEMAND SLOWDOWN

Barclays Capital, one of the most bullish forecasters of oil prices this year, now sees slower global demand growth this year. In a report to be published in the next few days, Barclays Capital now sees global oil demand increasing by 1.1 million barrels per day (bpd) this year to 88.68 million bpd, to reflect the dramatic economic slowdown.
The investment bank previously forecast a rise in oil demand this year of 1.56 million bpd and two months ago expected the increase to be as much as 1.7 million. The sharp reduction would take it from one of the most bullish on growth to one of the most bearish, according to a Reuters poll two months ago.
US weekly jobless claims on Thursday suggested a marginal improvement in the labour market, following disappointing manufacturing and consumer spending data earlier this week.
US gasoline futures led the slump, with their premium over U.S. crude falling to the lowest in a month after stockpile data added to evidence that expensive fuel and a weak economy have reduced demand in the world's top user.
As crude oil broke below its weeks-long trading range, implied volatility in the options market spiked to the highest since the May 5 melt-down. The so-called Oil VIX index based on NYMEX options surged more than 26 percent.
In commodities, the 19-commodity Reuters-Jefferies index, a global benchmark for the asset class, fell 2.8 percent on Thursday, its biggest one-day decline since May 11.
The European Central Bank resumed buying government bonds after a four-month break and announced new longer-term funding for liquidity-starved banks. But after a brief hiccup, Italian and Spanish bond yields continued their inexorable climb towards danger levels.