SINGAPORE: Brent crude fell towards $109 on Tuesday, as a warning by ratings agency Standard & Poor's that it might downgrade euro zone countries tempered hopes for a concrete resolution to the region's debt crisis.
The S&P news also overshadowed ongoing tensions between OPEC producer Iran and the West that could lead to crude supply being disrupted from the world's fifth-largest exporter.
Brent crude fell 51 cents to $109.30 a barrel by 0303 GMT, after settling down 13 cents to $109.81 on Monday.
US crude shed 46 cents to $100.53 a barrel. It had settled almost flat at $100.99 a day earlier.
"Prices had run up earlier because traders have been positioning themselves for a possible resolution to the euro zone crisis, and they've arrived at a level where any negative news like the S&P report will result in some tweaking of positions," said Ric Spooner, chief market analyst with CMC Markets in Sydney.
Oil prices were also depressed by a stronger US dollar, which rose 0.2 percent against a basket of currencies as the euro dipped on the S&P downgrade warning.
A pricier dollar usually prompts investors using non-US currency to trim their holdings of risky assets such as oil.
The threat of a supply risk from Iran, which has helped keep oil prices above $100 a barrel, eased slightly after diplomats and traders said the European Union is becoming sceptical about slapping sanctions on imports of Iranian oil due to fears that an embargo might damage its own economy.
This comes after US defense secretary Leon Panetta argued last week against any imminent military action against Iran over its nuclear program.
However, the risk of a unilateral strike on Iran by Israel or an escalation of tensions between Tehran and its Arab neighbours still remain, analysts said.
OPEC OUTPUT
Market participants are eyeing next week's OPEC meeting, where the group's members look set to agree on a new production target that legitimises current cartel output around 30 million barrels a day.
Iran appears to have given up its campaign to have Gulf Arab nations cut back supply, with Iranian Oil Minister Rostam Qasemi telling Reuters on Monday that Tehran would be guided by the recommendations of the cartel's Vienna-based secretariat.
"Today's elevated oil price is likely to discourage OPEC from cutting, regardless of the rhetoric from Vienna on Dec 14.," said analysts at Morgan Stanley in a research note.
"Historically, we find price as the key determinant of OPEC production, not quotas or rhetoric."
In the United States, crude oil inventories likely fell last week after rising sharply the week before as imports probably dropped, a preliminary Reuters poll of analysts showed on Monday.
On average, US crude stockpiles were expected to have fallen 1.1 million barrels in the week ended Dec. 5, according to the poll of seven analysts.
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