Oil fell below $73 a barrel on Friday, extending losses after its biggest one-day fall since July, and as the U.S. dollar hit a seven-month high against a basket of currencies.
Traders said the stronger dollar, which tends to move inversely with many commodities because they are priced in the U.S. currency, worries about the health of the euro zone together with weaker stock markets were a powerfully negative combination for oil.
U.S. crude oil for March delivery was down 17 cents at $72.97 per barrel at 4:06 a.m. EST. On Thursday, it touched a 2010 intraday low of $72.42 and closed down 5 percent. London ICE Brent for March fell 42 cents to $71.71.
It's a toxic mix for oil and commodities, said Carsten Fritsch, analyst at Commerzbank in Frankfurt. Bearish sentiment prevails across all commodities. The pessimism is very strong and anything considered at all risky is being sold.
The dollar index, a measure of the greenback's performance against six major currencies, leapt as concern deepened about worsening fiscal problems in south European countries. A stronger U.S. dollar makes commodities, like oil, more expensive for those holding alternative currencies.
Sentiment was fragile ahead of key U.S. non-farm payrolls numbers due at 8:30 a.m. EST, which could show unemployment continuing to rise in the world's largest economy, especially after an unexpected increase in jobless claims.
European shares hit two-month lows on Friday after hefty falls the previous day, with growing worries about the sovereign debt situation in the euro zone and anxiety ahead of key U.S. jobs data hurting sentiment. <.EU>
The euro hit its weakest level against the dollar in more than eight months on Friday as traders dumped the single European currency due to festering concerns about the fiscal health of some euro zone countries.
Oil fell 5 percent on Thursday, its steepest daily drop since July and the fifth-largest trading volumes ever on the New York Mercantile Exchange as investors dumped commodities and other risky assets.
Rising U.S. unemployment claims and fear that debt-laden European economies may falter exacerbated the selling.
Oil is now about 50 percent of its record above $147 traded in July 2008, having shed about $11 from a 15-month high close at $84 on January 11.
Traders and brokers at several firms said they suspected Thursday's sell-off in crude was also linked to a hedge fund quickly unloading a big oil position.
A sudden rush of volume in front-month New York Mercantile Exchange (NYMEX) crude oil futures trading during the final moments of open-outcry trading on Wednesday was followed on Thursday by the fifth-highest trading volume on record for the contract at nearly 500,000 lots.
(Reporting by Christopher Johnson; editing by Sue Thomas)