Oil drops more than 4 percent as commodities plunge

Excess oil is burnt off at the Mobil oil refinery at Altona in Melbourne June 27, 2008.

NEW YORK (Reuters) - Oil tumbled more than 4 percent on Wednesday, the biggest drop in over two months as a commodities selloff led to breaches of key technical support.

Worries that the Organization of the Petroleum Exporting Countries lacked a mechanism to quickly trim production of individual member quotas, after agreeing on a high output ceiling, added to selling pressure.

Brent crude dropped below its 300-day moving average and U.S. crude fell under its 200-day moving average.

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Graphic on oil's drop: here

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Early pressure on commodities came from investors disappointed that the European Central Bank is not buying more bonds of troubled European countries, a move that was widely seen in markets as a requisite next step following last week's EU summit on strengthening fiscal unity in the bloc.

The euro sank against the dollar, gold fell 4 percent and other commodities dropped sharply as investors sought safer havens.

"That has to do with some real fear about not only slowing global growth, but also default," said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut.

"Certainly some large players in the market appear to be liquidating, taking profits and preparing for margin calls."

The gains erased a 2 percent surge in crude prices on Tuesday that had been attributed in part to concerns about a potential blocking of the Strait of Hormuz by Iran, although many traders struggled to pinpoint a cause for the jump.

In London, ICE Brent crude for January delivery settled at $105.02 a barrel, down $4.48 or 4.09 percent, the biggest one-day percentage loss for Brent since September 22.

Brent broke below its 300-day moving average of $107.08 and hit a session low of $104.36, the lowest for front-month Brent since October 6.

NYMEX January crude settled at $94.95 a barrel, falling $5.19, or 5.18 percent, U.S. crude's biggest one-day percentage loss since September 22.

U.S. crude dropped below the 200-day moving average of $95.98 and settled at its lowest since November 4.

The market shrugged off data from the Energy Information Administration showing a 1.9-million-barrel drop in U.S. crude stockpiles last week, though some traders said a 3.8-million-barrel build in gasoline stocks added to bearish sentiment.

WEAK EURO, OPEC SUPPLY TARGET

Reinforcing the difficulties facing some euro zone governments to raise funds, Italy sold 3 billion euros of five-year government bonds on Wednesday at a yield of 6.47 percent, up from 6.29 percent.

The euro broke 11-month lows versus the dollar below $1.30 after Rome's auction, with foreign-exchange markets still speculating that more rating downgrades were in prospect for euro zone governments.

"Crude prices are down today as the euro weakened substantially against the dollar, with bad news coming out of Europe as last week's EU agreement is starting to unravel," said Richard Soultanian, co-president of NUS Consulting, a global energy management firm.

OPEC agreed on a new supply target of 30 million barrels daily, roughly in line with current production in a deal that settles a six-month-old argument over output levels in Saudi Arabia's favor.

However, there was no mechanism in place to cut quotas should already-fragile demand grow less quickly than expected, and combined with a general bearish tone to the market due to funding worries, that helped pull down prices sharply.

Questions remain over whether the OPEC cap can be enforced, given that Libya is set to increase production substantially next year.

(Additional reporting by Robert Gibbons, Matthew Robinson and Eileen Houlihan in New York; Simon Falush, Emma Farge and Zaida Espana in London; Editing by Dale Hudson and Matthew Robinson)