Oil prices fall on US, Europe debt fears

LONDON: Crude oil prices fell on Monday amid growing fears of a sovereign debt default on either side of the Atlantic and on the possibility of another emergency stock release from the International Energy Agency (IEA).

By 1413 GMT, Brent crude futures fell $1.61 to $115.65 a barrel. US crude, meanwhile, extended losses, taking a cue from Wall Street, losing $2.16 at $95.08 a barrel.

Oil prices reversed Friday's gains as nervous investors took refuge in gold, which rallied to record highs above $1,600 an ounce in Europe on Monday.

Policymakers on both sides of the Atlantic have offered no clear solutions to markets on their respective debt problems, forcing investors into perceived 'safe havens'.

In Europe, eight of 90 banks failed stress tests to determine whether they could withstand a long recession. Expectations were for up to 15 banks to fall short.

The better-than-expected results of the tests failed to dispel the broader gloom sweeping markets.

"This week, we think market focus will remain on both the US debt talks, but perhaps more importantly on what the EU leaders decide to do about the various 'fires' around them when they meet on Thursday," MF Global analysts said.

German Chancellor Angela Merkel called on Sunday for private investors to make a major contribution to bailing out Greece as pressure rose for radical action to cut the country's debt burden.

"The lingering debt ceiling crisis in the US is not as serious, as in a worst case scenario politicians will make only marginal cuts and run for cover, thus providing themselves with 'the out' they need in order to raise the debt ceiling," MF Global added in a note.

Republican and Democratic senators sought on Sunday to craft a plan that could avert an unprecedented default by the top oil consumer while making modest cuts in the deficit.

But there were few signs of progress as the Aug. 2 deadline to avoid a default drew dangerously close.

Failure to increase the debt ceiling by then could send shock waves through global financial markets and may plunge the United States into another recession, economists have warned.

Global consumer confidence fell in the second quarter to its lowest level in a year and a half as the uncertain economic outlook, a deepening euro zone debt crisis and rising inflation made people more cautious, a survey showed.

The dollar index, which tracks the greenback against a basket of currencies, meanwhile, rallied by 0.59 percent by 1227 GMT.

"Oil prices are standing their ground relatively well given the strong US dollar, though we believe this relative strength is not really due to economic reasoning or the current supply bottlenecks. Instead, it shows investors' growing interest in commodity investments, which are in high demand amid the uncertainty on equity and foreign exchange markets," Commerzbank analysts said in a note.

Speculators betting on oil raised sharply their net long positions on Brent and gasoil contracts trading on the Intercontinental Exchange (ICE) in the week to July 12, the exchange said on Monday.

On the physical front, pricing service Platts said it is considering extending its physical dated Brent crude price assessment period to a longer 10-25 days as of January next year.

IEA

The IEA is expected to confer with its member countries by July 23 to decide whether to draw further on emergency oil stocks, a move that requires the backing of all 28 members.

Last month, member countries released 60 million barrels, only the third such move in the IEA's history.

The IEA stock release drove Brent down to $102.28 on June 27, but now prices are at a similar level to where the front-month contract was trading when the Organization of the Petroleum Exporting Countries failed to agree on a collective output increase on June 8.

"It is too early for the IEA to release stocks for the second time within such a short time," said Serene Lim of ANZ bank. "In the previous release, there were some countries that were not producing or releasing the stipulated amount."

Copyright Reuters, 2011