By Polya Lesova & Myra P. Saefong, MarketWatch
FRANKFURT (MarketWatch) -- Crude futures dropped 5% on Friday, breaking below $73 a barrel, as investors spooked by Dubai's debt troubles sold assets perceived as risky, including commodities ranging from oil to metals.
Crude oil for January delivery fell to an intraday low of $72.39 a barrel in electronic trading on Globex.
The contract was last down $3.89, or 5%, to $74.07 a barrel.
"If you have equity markets that are correcting, that's also having a knock-on effect on commodity markets, particularly oil," said Harry Tchilinguirian, senior oil analyst at BNP Paribas in London.
"A lot of what happens in oil relates to movements in other asset markets," such as currencies and equities, Tchilinguirian said. "With liquidity and a lower-interest-rate environment, you have the opportunity to for oil to behave more like an investment asset rather than a consumption asset."
U.S. stock-index futures indicated a sharply lower opening on Wall Street in the wake of losses in European equities and a sell-off in Asia. Read more on how global markets reacted.
The declines came as investor sentiment dived in the wake of news that Dubai's main conglomerate, Dubai World, has asked creditors for a six-month stay on debt repayments of $59 billion.
The prices of oil, gold and other commodities fell sharply, as the U.S. dollar and the Japanese yen rose on the back of safe-haven inflows.
The dollar index (DXY 75.35, +0.52, +0.70%) , which tracks the performance of the greenback against a basket of currencies, rose 0.7% to 75.338.
The dollar and oil, which is priced in dollars, have had a very strong inverse relationship in recent months. When the dollar rises, oil and other commodity prices tend to fall.
Analysts have pointed out that the oil market's fundamentals -- high levels of supplies and relatively weak demand -- don't justify the recent surge in the oil price.
Oil prices have mostly been trading up on positive sentiment in the financial markets, so the sharp shift in sentiment following the news from Dubai is prompting investors to sell oil.
"The support for oil prices has been psychological rather than physical," said James Williams of WTRG Economics in emailed comments. "In the physical market, inventories remain high and consumption tepid at best."
The U.S. and the rest of the developed world have nearly 60 days of petroleum stocks, Williams said, adding that any number above 50 is a "historical sign of weak prices."
Darin Newsom, a senior analyst at Telvent DTN, said that oil prices are "still battling bearish underlying fundamentals" despite the latest inventory data from the U.S. Energy Information Administration.
Government data on Wednesday showed U.S. crude inventories increasing less than expected last week. See Wednesday's Futures Movers.
Traders are reacting to the "difference between government numbers and market opinion," Newsom said. "Contango in futures spreads has moved past $1.30, indicating a more bearish supply and demand" picture.
Contango refers to a situation where the price of a commodity for future delivery is higher than the spot price.
