Brent crude falls more than $1 on grim economic outlook

SINGAPORE: Brent crude slumped more than $1 on Thursday on concerns oil consumption may fall as steps announced by the US Federal Reserve may not be enough to jump-start an economy the central bank said faces significant downside risks.

Brent futures fell $1.22 a barrel to $109.14 by 0211 GMT, after slumping as low as $108.50. US crude fell $1.24 to $84.68, after slipping to $84.15.

The Fed said it would extend the maturity of its treasury holdings but didn't offer more aggressive measures to boost the world's biggest economy. The comments overshadowed data showing US crude stocks posted their biggest weekly drop in more than nine months, along with a rise in gasoline stocks.

"It is hard to ignore the macroeconomic picture. Oil seems to have fallen in line with equity markets," said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp. "Otherwise, the data on crude stocks was fairly bullish for oil. Prices shouldn't have fallen so low, based on just oil fundamentals."

US equities suffered their worst drop in a month after the comments, while gold slumped 1 percent and copper fell to near the day's low.

The Fed also said it discussed a variety of other policy tools to promote stronger growth, but stopped short of announcing any more measures. The bank plans to extend the maturity of Treasuries, buying $400 billion in long-term notes, while selling an equivalent amount of bonds maturing in three years or less by mid-2012.

"The sell-off appears to be the unwinding of positioning ahead of an anticipated announcement of further liquidity addition, despite clear signalling from the Fed that conditions are not right for this kind of stimulus," Michael McCarthy, chief market strategist at CMC markets, said in a report.

The dollar surged to a seven-month high against major currencies , boosted by the appeal of higher short-term rates on US bonds. A firmer dollar makes oil more expensive for holders of foreign currencies.

The Fed's announcement overshadowed an unexpectedly steep drop in crude supplies in the world's top oil consumer.

Domestic crude inventories fell 7.34 million barrels in the week to Sept. 16 to 339.05 million barrels, the lowest level since January, the US Energy Information Administration reported.

Gasoline inventories rose 3.3 million barrels to 214.08 million barrels during the week compared with expectations for a 1.2-million-barrel rise. Average gasoline demand in the last four weeks dropped 1.7 percent from year-ago levels.

Brent will fall to $92.86 per barrel over the next three months, as a downward wave "C" is unfolding, while US oil will fall to $64 per barrel by the end of 2011, as it has reversed a medium-term uptrend that started at the December 2008 low of $32.40 per barrel, according to Reuters technical analyst Wang Tao.

Oil prices will continue to head down in coming weeks because of the uncertainty surrounding the global economic outlook for growth, Mitsubishi's Nunan said, adding that US oil may head down to $75 a barrel and Brent to about $90-$95.

Greece adopted yet more austerity measures to secure a bailout installment crucial to avoid running out of money next month, as the IMF warned that Europe's sovereign debt crisis risked tearing a giant hole in banks' capital.

"The whole macroeconomic outlook is very bad still," Nunan said. "You look at Greece, you look at Europe. They are still trying to fix the debt situation."

Still, losses may be capped, with OPEC producers likely to step in to curb output to ensure prices do not slide much below $100 a barrel for Brent, Nunan said.

Copyright Reuters, 2011