SINGAPORE; Brent oil dropped to stay below $107 per barrel on Wednesday, with prices on track for their biggest monthly decline in two years on risk aversion triggered by a worsening euro zone debt crisis that continues to muddy the outlook for fuel demand.
Concerns about the debt-laden single currency bloc heightened after Egan-Jones Ratings cut Spain's credit rating for the third time in less than a month as the country's borrowing costs spiralled towards unsustainable levels.
"There is definitely renewed concerns of a contagion in the euro zone with the debt crisis, there is real pressure now on Spain's banks, it's a crisis of confidence," said Ric Spooner, chief market analyst at CMC Markets.
Brent crude eased 21 cents to $106.47 per barrel by 0431 GMT, heading for a nearly 11 percent drop in May, while US crude fell 33 cents to $90.43.
US crude was on track for a more than 13 percent drop this month, also the biggest monthly decline since May 2010, with a surge in domestic stockpiles dragging down prices.
Crude stocks at Cushing, Oklahoma storage hub, delivery point of the US crude oil future contract, have risen to a record high of 46.8 million barrels.
Oil prices also came under pressure as the euro hit a two-year low and the dollar index firmed amid Spain's debt woes. A stronger dollar makes commodities priced in the greenback more expensive for holders of other currencies.
But oil price losses may be checked by supply concerns as Iran's dispute with the West over Tehran's nuclear program remains unresolved and easing worries about a messy Greek exit from the euro zone after an opinion poll showed leads for Greece's pro-bailout conservatives.
EU leaders have warned Greece of the consequences of renouncing the bailout, saying they will pull the plug on funding - a move that would lead to rapid bankruptcy and an ignominious exit from the single currency.
"Honestly at the moment there doesn't seem to be an adequate contingency in dealing with Greece," Spooner said.
IRAN TENSIONS
A drop in oil prices was limited by concerns over rising tensions between Iran and the West after talks failed to resolve a dispute over the Islamic republic's nuclear program last week.
"Iran continues to remain a significant factor but for the moment with a short to medium term outlook the focus is on Europe and the demand side picture if the crisis continues to deteriorate," Spooner said.
"But we have been building inventories since Libya's production went offline last year, and with Saudi Arabia pumping more, there is a big enough buffer to deal with any sudden disruption of supplies."
Tehran is refusing to grant United Nations inspectors access to a facility at Parchin which is suspected of being used to develop nuclear weapons. Iran says its aims are entirely peaceful.
Iran has ramped up its production of low-enriched uranium, in the last five years and it could be used for at least five nuclear weapons if refined further, the US-based Institute for Science and International Security (ISIS) said.
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