LONDON: Oil edged up near $104 on Thursday as buyers moved back in after Wednesday's heavy sell off, but continuing nervousness around the demand outlook and the eurozone crisis kept oil on course for its biggest monthly percentage drop in two years.
Brent crude futures for July delivery were up 50 cents at $103.97 per barrel by 0945 GMT, off a low of $102.90 hit earlier in the session. Prices were on track for a monthly loss of around 13 percent, the biggest since May 2010, after slipping 3 percent on Thursday.
US crude for July delivery was up 36 cents to $88.18 per barrel. Prices were headed for a steep monthly loss of around 16 percent - the worst since late 2008.
"The market is in a state of flux right now, driven by currencies and safe haven flights," said Ole Hansen, head of commodity strategy at Saxo Bank.
Dollar weakness and the euro's recovery from a two-year low helped lift oil prices as London traders arrived at their desks. A weaker dollar makes commodities priced in dollars more affordable for buyers using other currencies.
Hansen saw US crude finding support down towards $85 and ahead of $100 for Brent, as this is a crucial level from a technical point of view and given repeated statements by the Saudis.
"We are pretty close to a good support here," he said. "We've completely removed the geopolitical risk factor and now the demand side has come back into focus. There is some nervousness we could see a deeper slowdown than what was expected."
He pointed to the poor economic performance data out of India, which has been one of the growth engines for energy consumption. India's annual economic growth slumped in the first quarter to a nine-year low of 5.3 percent as the manufacturing sector shrank.
EUROZONE CRISIS
The ongoing crisis in the eurozone also continues to dominate market sentiment. Mario Draghi, president of the European Central Bank, warned on Thursday that the ECB could not fill the vacuum created by the lack of action by national governments.
Spain's centre-right government has so far failed to spell out how it plans to finance a 23.5 billion euro ($29 billion) rescue of Bankia, the country's fourth-biggest lender.
This is unnerving markets and has driven the country's borrowing costs to levels at which Ireland and Portugal sought international bailouts. Spain's 10-year bond yield is currently around 6.58 percent, close to the crucial 7 percent mark.
"The situation in Spain at the moment is untenable, not only is there concern over the state of its banking sector but there is little confidence its government will actually be able to bail them out," said Michael Creed, an economist at the National Australia Bank.
This is keeping investors on the sidelines. Adding to the nervousness in markets is the fact that the outcome of the Greek election remains finely balanced, as different polls in recent days have produced highly contradictory results.
"The market is still trying to digest what is going on - we might see a technical rebound but the problems that led to the slump are by no means solved," said Eugen Weinberg, an analyst at Commerzbank in Frankfurt.
"The risk is not yet priced in - that's what the market action is telling us."
The market is also awaiting US oil inventories data from the US Energy Information Administration due for release later on Thursday. According to a Reuters poll, stockpiles are expected to see a 10th consecutive weekly rise for the week to May 25.
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