Brent crude oil drops under $113 on Italian vote fears

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Brent crude oil fell to a one-month low - under $113 a barrel - on Tuesday as inconclusive Italian election results revived investor concerns about instability in the euro zone and threatened the outlook for fuel demand.

The vote result in the euro zone's third-largest economy stoked fears that the country's politicians would be unable to form a government strong enough to carry out effective reforms.

The election results "played out in the end of the day yesterday" in the markets, pushing prices lower early on Tuesday, said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

Oil markets also watched as U.S. Federal Reserve Chairman Ben Bernanke defended the central bank's bond-buying stimulus, which is seen as tied to the economic recovery and thus oil demand, before Congress early on Tuesday.

Bernanke warned about the risks of sharp spending cuts set to go into effect on Friday, but also said the central bank has all the tools it needs to retreat from its monetary support in a timely fashion.

But the oil complex decoupled from U.S. equity markets, which had rebounded from a sharp selloff Monday as poll results in Italy pointed to deadlock. The Dow Jones industrial stock average was up 0.8 percent at 3:05 p.m. EST (2005 GMT).

Brent crude hit a session low of $112.41 a barrel, its weakest since Jan. 24, and settled down $1.73 at $112.71.

U.S. crude oil was down 48 cents at $92.63 a barrel, after touching a low of $91.92, a level not seen since Jan. 4.

Brent rallied to a nine-month high near $120 in early February but has since fallen back on signs the global economy remains fragile.

Brent fell below technical support at the 50-day moving average for the first time since January, a key indicator of market sentiment watched by traders.

The RBOB gasoline contract for March delivery led losses for much of the trading day, down more than 7 cents to $2.9816.

RBOB has been on an upswing since hitting a low of $2.6915 in mid-January, but with the March contract expiring on Feb. 28 ahead of the switchover to higher-specification summer fuel, traders said the move higher may have been overdone.

"Gasoline rose on increasing demand, which was being fostered by the improving economy and U.S. employment," said John Kilduff of the Again Capital hedge fund in New York.

"Recent events in Europe and the looming U.S. spending cuts threaten that outlook."

Investors also eyed talks in Kazakhstan between major powers and Iran over Tehran's nuclear program. The group of six nations - the United States, Russia, China, Germany, Britain and France - was expected to offer Iran limited sanctions relief on Tuesday if it agrees to halt its most sensitive nuclear work.

While few traders expected the meeting to create an immediate breakthrough, a reduction in tensions could weigh on oil.

Prices could come under further pressure should weekly reports on U.S. crude and product stockpiles, due on Tuesday and Wednesday, show an increase.

A Reuters poll ahead of industry group the American Petroleum Institute's report on Tuesday at 4:30 p.m. EST (2130 GMT) forecast crude stocks would be up by 2.3 million barrels, the sixth straight weekly increase.

The closely watched U.S. Energy Information Administration numbers are released at 10:30 a.m. EST (1530 GMT) on Wednesday.

(Addtional reporting by Peg Mackey and Alex Lawler in London and Manolo Serapio Jr. and Manash Goswami in Singapore; Editing by Alison Birrane, Dale Hudson, Alden Bentley and Gunna Dickson)



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