Brent dips below $111, Spain downgrade weighs

SINGAPORE: Brent crude dropped below $111 on Wednesday as concerns over demand growth weighed after Moody's Investors Service cut Spain's sovereign ratings by two notches, adding to uncertainty over the euro zone's debt crisis and economic growth.

Moody's said the downgrade was partly due to the challenge Spain faced in meeting its fiscal target because of the region's worsening growth prospects. The cut, ahead of a crucial meeting of European policymakers this weekend, capped gains in Asian stocks and base metals, and pulled the euro lower.

Brent crude fell 31 cents to $110.84 a barrel at 0333 GMT, after slipping to as low as $110.82. US crude declined 24 cents to $88.10 a barrel.

"Participants lack clear confidence in the market and that will result in prices trading in a very narrow range till the outcome of the European Union meeting is known," said Ken Hasegawa, a commodities derivatives manager with Newedge Brokerage in Tokyo. "The US benchmark will inch closer to $90 this week, and that is a very important point technically."

Oil rose on Tuesday, helping limit losses across commodities, as strong bank earnings lifted markets. Brent rose 99 cents to settle at $111.15 a barrel after falling below the 50-day moving average to touch a seven-day low of $108.45. US crude rose $1.96 to settle at $88.34 a barrel a day before the contract expires.

Moody's said the high levels of debt in the banking and corporate sectors leave Spain vulnerable to funding stress. In particular, the ratings agency said it continues to have serious concerns regarding the funding situation of the regional governments.

Moody's also cast doubt on France's triple-A credit rating, saying it may slap a negative outlook if slower growth and the costs of helping bail out banks and other euro zone members stretch its budget too much. Standard & Poor's cut the ratings of 24 Italian banks and financial institutions on weaker growth prospects.

Brent is expected to drop to the previous trading session's low of $108.45 per barrel, while US crude may inch up to $89.76 a barrel as the unexpected sharp rise on Tuesday signals the rebound of that started from the Oct. 4 low of $74.95 per barrel has not completed, Reuters technical analyst Wang Tao said.

Crude prices are getting support from the unexpected decrease in crude stocks in the United States, the world's biggest oil consumer.

Crude stocks fell 3.1 million barrels in the week to Oct. 14, oil trade group American Petroleum Institute said on Tuesday, while analysts had expected a 1.8-million-barrel increase. Gasoline stocks fell 1.6 million barrels, more than the 1.3 million barrel fall expected by analysts.

"This is a big number," Hasegawa said. "It is providing support to prices despite the uncertainty."

The market will be watching for data from the US Energy Information Administration, due out Wednesday at 1430 GMT.

Prices were also supported by comments from Atlanta Fed President Dennis Lockhart that the US economy is unlikely to slip back into recession, and an improvement in recent indicators has been encouraging.

Copyright Reuters, 2011