Brent Slips Below $112 On Euro Zone Woes

16.11.2011 -

Brent crude slipped below $112 on Wednesday, reversing some of the previous session's gains on worries that new governments in Greece and Italy may fail to muster political clout to impose unpopular reforms and contain the region's debt crisis.

Oil markets are looking for clues on demand growth from Europe, with Italy due to unveil a technocrat-led cabinet and a new Greek coalition expected to win a confidence vote. Asian shares fell because of the uncertainty and the euro hit a five-week low.

"The debt crisis seems to be spreading from peripheral euro zone countries to core euro zone countries such as France," said Ben Le Brun, market analyst at OptionsXpress. "We saw prices get some support from economic data out of the United States, China and also Europe."

France has become the latest euro zone member to come under pressure after a spike in its borrowing costs on jittery bond markets fuelled concerns the region's second-biggest economy was also being sucked into the spiraling debt crisis, besides nations like Italy and Spain.

"Italian and Spanish bond yields continue to be watched by traders around the globe for clues as to whether we can breathe a sigh of relief, or conversely, raise the state of alarm," Tim Waterer at CMC Markets said in a report.

Brent has turned neutral as it hovers above a support at $111.71 per barrel, and U.S. oil has resumed an uptrend within a rising channel, towards a target at $101 per barrel, according to Reuters market analyst Wang Tao.

Oil rose on Tuesday on optimism over continued economic growth, sending U.S. crude to a 16-week peak.

U.S. retail sales rose and wholesale prices fell in October and a gauge of New York state manufacturing showed growth in November, bolstering hopes for a stronger fourth quarter. Data showing the German and French economies managed to expand in the third quarter added support.

Price Outlook

Oil is also getting support from growing supply concerns, with tensions escalating over Iran's nuclear program. Western states will try this week to overcome divisions with Russia over a U.N. nuclear report on the Middle East nation, hoping to show big power unity that will pile pressure on Tehran to address growing fears it wants atomic bombs.

"It is true that concerns over Iran have been around for some time, but you cannot ignore the fact that Iran is a major supplier," said Le Brun."The market has been trying to factor in the developments."

Oil prices currently command a risk premium of about $4-$5 a barrel because of Iran, Le Brun said.

But Le Brun also warned that higher prices may hurt consumers and impact growth. The comments were echoed by the head of the International Energy Agency (IEA) Maria van der Hoeven, who said high oil prices could endanger Europe's economic recovery.

U.S. crude prices are getting weighed down by data from the American Petroleum Institute showing that oil inventories unexpectedly rose 1.3 million barrels in the week to Nov. 11, compared with analysts expectations for a drawdown of 1.2 million.