Oil drops below $96 on EU growth concerns

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Oil prices fell below $96 a barrel Wednesday on rising concerns that Italy will become the next victim of the eurozone's sovereign debt crisis and further damage the prospects for economic growth in the region.

By early afternoon in Europe, benchmark crude for December delivery was down $1.26 at $95.54 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.28 to settle at $96.80 in New York on Tuesday.

In London, Brent crude was down $1.40 at $113.60 a barrel on the ICE Futures exchange.

The rise of Italy's borrowing rate to above 7 percent on its 10-year bonds stoked fears that despite the welcome news of Prime Minister Silvio Berlusconi's pledge to soon leave office, it will be difficult for the eurozone's third-largest economy to effectively handle its financial problems.

"Berlusconi will leave one day but what matters are the yields that Italy needs to pay on its bonds," said Olivier Jakob of Petromatrix in Switzerland. "At a spread of 5 percent to German bonds, they are clearly in the danger zone."

The EU's debt crisis also hurt oil prices by boosting the U.S. dollar, which made strong gains on the euro. A stronger dollar makes crude more expensive for investors trading in other currencies. The euro was down over 2 cents, to $1.3632 from $1.3835 late Tuesday in New York.

Prices were also kept in check by a report from OPEC, the group of countries supplying of about a third of the world's oil, which cut its projection for global economic growth next year to 3.6 percent from 3.7 percent. It said demand from the industrial world would likely ease, "as a result of slowing economic momentum, particularly" in the European Union.

Earlier in the session, the Nymex contract rose as high as $97.32, as a drop in China's annual inflation rate — to 5.5 percent in October from 6.1 percent in September and a 37-month high of 6.5 percent in July — alleviated concerns that a stricter monetary policy — with its dampening effects on economic growth — would be needed to keep consumer prices under control.

"There is no need for further tightening," said Citigroup, which forecast inflation will slow to below 5 percent by December. "Falling inflationary pressures give the government more flexibility to ease policies."

A belief that the global economy is slowing less than previously forecast has helped fuel a 28 percent surge in crude since it dropped to $75 on Oct. 4.

Concern about a possible conflict with Iran over its nuclear power program also helped support prices. Iran, the world's fourth-largest oil exporter, is suspected of developing nuclear weapons, according to a United Nations report released Tuesday. Its nuclear program could lead to international trade sanctions, and Israel has threatened military action.

"Disruptions to Iranian supply would drive oil prices significantly higher," financial services firm Morgan Stanley said in a report.

Traders are also closely watching the latest U.S. crude inventory figures. The American Petroleum Institute said late Tuesday that crude inventories rose 148,000 barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted an increase of 1 million barrels.

Inventories of gasoline fell 1.5 million barrels last week while distillates dropped 2.9 million barrels, the API said.

The Energy Department's Energy Information Administration reports its weekly supply data — the market benchmark — later Wednesday.

In other Nymex trading, heating oil rose 0.9 cent to $3.13 per gallon and gasoline futures added 0.9 cents to $2.72 per gallon. Natural gas slid 1.3 cents at $3.73 per 1,000 cubic feet.

___

Alex Kennedy in Singapore and Tarek El-Tablawy contributed to this report.


Copyright 2011 The Associated Press.



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