Oil prices tumbled more than 6% on Thursday after the world's consumer nations banded together to aid the global economy by releasing emergency oil reserves for the third time ever.
Oil fell to its lowest since February, before civil war halted Libya's supplies, after the International Energy Agency said it would inject 60 million barrels of government-held stocks in the global market, immediately increasing world supply by some 2.5% for the next month.
The move shocked traders who had been expecting the IEA to give top exporter Saudi Arabia more time to make up for the supply shortfall following OPEC's failed meeting on June 8, when other members blocked Gulf efforts to hike output.
"I'm really surprised. Everyone's been saying they've got enough stocks. This should keep WTI (US crude) under $100 (per barrel), but really we want Brent there, and this should help," said Robert Montefusco, broker at Sucden Financial.
Brent crude futures for August plunged by more than $8 after the news, nearly hitting its lowest intraday price since Feb. 22. It had pared some of those losses by 12:28pm EDT (1628 GMT), trading down $7.10 at $107.11 a barrel. That would be its fifth-largest one-day fall ever in dollar terms.
US crude lagged the decline as traders bet the relaxation of European reserve requirements would have a more direct and immediate impact on London Brent.
August US crude dropped $4.67 to $90.74 a barrel, taking prices more than 20% below their post-2008 high above $114 in early May.
"I think we have confirmed the bottom of the oil market here," said Carl Larry of Blue Ocean Brokerage.
"I am not sure where we can find much more bearish news."
Brent hit hardest
The deeper drop in Brent pushed the London grade's premium to US oil to below $17 a barrel, off more than $2 a barrel from Wednesday.
As part of the action, the United States will release 30 million barrels of crude from its Strategic Petroleum Reserve, specifically light sweet oil.
Brent trade volumes surged to a record high, with over 965,000 lots traded just after midday in New York, already double the 30-day average. US volume neared 700,000 lots traded, approaching the 30-day average.
The Brent futures curve flattened on the news, with the premium of the August contract to the September contract to 8 cents, down from 45 cents on Wednesday.
Oil markets were already off sharply ahead of news of the release, due to worries over global fuel demand following higher-than-expected US jobless claims, forecasts of lower US growth from the Federal Reserve and evidence of a slowdown in Chinese manufacturing.
The sell-off also followed a move by the US Federal Reserve on Wednesday to cut its growth forecasts for the world's biggest economy.
IEA eyes economies
"This supply disruption has been underway for some time and its effect has become more pronounced as it has continued," said the IEA. It said expectations were that Libyan production would remain off the market for the rest of 2011.
"Greater tightness in the oil market threatens to undermine the fragile global economic recovery," it said.
The IEA release, at 2 million barrels per day (bpd) over the next 30 days, is more than the daily loss of Libya's 1.2 million bpd exports and comes despite a broad view that the world is not now short of crude -- although many analysts and agencies also agree that markets will tighten later this year.
Against that backdrop, analysts said the use of the reserves now -- unlike the previous two releases, which immediately followed the first Gulf War and Hurricane Katrina -- signalled it may have been more concerned with tempering prices to aid a faltering economic recovery.
"The move is significant, as it represents a reach by member countries for the remedy of last resort to high oil prices," said John Kilduff, a partner at Again Capital LLC.
"Clearly, the energy price spike is being cited as the reason for the economic slowdown and this is a reaction to that. The Libyan outage provides good cover."