Brent crude steady above $109, euro zone woes weigh

SINGAPORE: Brent crude futures steadied above $109 on Tuesday, after two days of heavy losses on worries that a looming default by Greece will destabilise the global financial system, threaten global growth and pare oil consumption.

A downgrade of Italy by Standard and Poor's confirmed fears of the debt crisis spreading across Europe. On the other side of the Atlantic, the US Federal Reserve begins a two-day meeting to find ways to bolster growth in the world's biggest economy.

This twin uncertainty has prompted investors to exit riskier assets, from stocks to base metals to the euro.

Brent crude traded at $109.35 a barrel at 0513 GMT, 21 cents higher than its settlement, while US crude fell 8 cents to $85.62 a barrel.

"Investors are very worried about Europe, and this is not just impacting oil but it is across the board to stocks and other markets," said Ken Hasegawa, a commodity derivatives manager at Japan's Newedge brokerage.

Strong technical resistance at $90 a barrel for US crude is another reason for prices to stay weak, Hasegawa said.

US oil has started a medium-term downtrend and will fall more to $83.20 per barrel, while Brent will drop to $107.33, based on its wave pattern and a Fibonacci projection analysis, according to Reuters technical analyst Wang Tao.

Oil has weathered much of the turmoil in financial markets over the past month thanks to supportive fundamentals, such as diminished North Sea production and healthy Chinese demand, but has fallen sharply for two days.

On Monday, Brent crude fell $3.08 to settle at $109.14 a barrel, while US October crude, which expires on Tuesday, dropped $2.26 to $85.70 a barrel.

Standard and Poor's cut its unsolicited ratings on Italy, the euro zone's third-largest economy, by one notch to A/A-1 and kept its outlook on negative, a surprise move, saying the fragility of Rome's ruling coalition would likely limit the government's ability to tackle the crisis.

This resulted in the euro falling sharply in early Asian trade, edging closer to a seven-month low versus the dollar. A firmer dollar makes oil more expensive for holders of foreign currencies. Investors are putting money into safer assets such as gold and the dollar because of the uncertainty.

SUPPORTING PRICES

Adding a floor to oil prices were comments by Greek's Finance minister Evangelos Venizelos that the country was near a deal with its international lenders.

Remarks by OPEC Secretary General Abdullah al-Badri that producers who had increased output to make up for the shortfall in shipments from Libya will reduce production as Libya gradually comes back online also helped provide a support.

"Perhaps the most significant of Al-Badri's comments was the recognition that the members of OPEC will reduce output to accommodate Libyan production as it resumes," analysts at JPMorgan said in a report.

"This adds weight to our view that OPEC will respond to any risk of oversupply in order to support prices near $100 a barrel."

Continued violence in the Middle East and North Africa also supported prices. Rockets hit a protest camp in Yemen's capital Sanaa, killing at least two people on Tuesday, witnesses said, on the third day of violence since the government's deadliest crackdown yet on pro-democracy demonstrations.

Copyright Reuters, 2011
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