Oil steadied around $73 per barrel on Friday, consolidating after its biggest one-day fall since July, and as the dollar hit a seven-month high against a basket of currencies.
Traders said the stronger dollar, which tends to move inversely to many commodities because they are priced in the U.S. currency, worries about the health of the euro zone and weaker equities were a powerfully negative combination for oil.
But the market gained some support from oil-focused hedge fund BlueGold, which denied what it said were false rumours about its continuing operations and said it was not behind oil price volatility in recent days.
Rumours over the health of an unidentified hedge fund were cited as a negative factor on Thursday as the oil market fell.
U.S. crude oil for March delivery was down 20 cents at $72.94 per barrel by 1439 GMT. On Thursday, it touched a 2010 intraday low of $72.42 and closed down 5 percent. London ICE Brent for March was down 40 cents at $71.73.
The market found some support from U.S. jobs data which showed U.S. employers unexpectedly cut 20,000 in January, but the unemployment rate surprisingly fell to a five-month low of 9.7 percent.
"The market reacted to the lower jobless rate number, which gave the stock market a boost and oil is going up off that," said Phil Flynn, analyst at PFGBest Research in Chicago.
"Obviously the credit issues in Europe could still be an issue going into the weekend and derail any rally."
Carsten Fritsch, analyst at Commerzbank in Frankfurt, said oil and commodities markets faced a "toxic mix" of factors including falling stock markets and rising risk aversion.
"Bearish sentiment prevails across all commodities. The pessimism is very strong. Anything 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 FRAGILE
European shares hit 10-week lows on Friday after hefty falls the previous day, with growing worries about sovereign debt in the euro zone, but pared losses after the U.S. jobs data.
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 (NYMEX) as investors dumped 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 in July 2008, down from a 15-month high close at $84 on Jan. 11.
Dealers said on Thursday they thought the sell-off was linked to a hedge fund unloading a big position.
A sudden rush of volume in front-month NYMEX crude 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.
For NYMEX crude oil prices and trading volumes click: http://graphics.thomsonreuters.com/gfx/JLeff_20100402174217.jpg
But the statement from BlueGold went some way to calm nerves that traders said had been frayed by the extreme volatility.
BlueGold Chief Executive Officer Dennis Crema told Reuters he "utterly and completely" denied his company was in any way responsible for the recent volatility in crude oil prices.
"We … deny any false rumours surrounding BlueGold's continuing operations," he added. "Business continues as usual."
