Oil down near $123 on demand concerns

LONDON Tue Feb 28, 2012 7:30pm IST

A worker holds a fuel nozzle at a petrol pump in Mumbai June 11, 2010. REUTERS/Danish Siddiqui

A worker holds a fuel nozzle at a petrol pump in Mumbai June 11, 2010.

Credit: Reuters/Danish Siddiqui

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LONDON (Reuters) - Oil prices slipped towards $123 a barrel on Tuesday as investors worried about high prices hurting demand, but supply concerns and the expectation of further liquidity injections from the ECB helped underpin prices at elevated levels.

Front-month Brent was down 99 cents to $123.18 a barrel by 1351 GMT, after settling more than $1 lower on Monday. U.S. crude was down 68 cents at $107.88 a barrel.

Analysts and traders said the rise in oil prices to near 10-month highs last week had led to worries about the impact on the struggling economies of Europe, especially as the euro remains weak against the dollar.

"There is some concern growing that high oil prices may impact the economy and oil demand in future," said Carsten Fritsch, an analyst at Commerzbank in Frankfurt.

"That is leading to profit-taking, which is not surprising given the huge build in speculative net long positions in recent weeks." He pointed to data from the CFTC showing that net long positions in U.S. crude futures had reached the highest levels since May 2011.

"We're going through a bit of consolidation," said Tony Machacek, a trader at Jefferies Bache in London. "Up until Friday we'd had five upward closes in a row and a steady climb since the last week of January."

The surge in prices - an increase of more than 14 percent for Brent crude futures since the start of the year - has prompted the International Monetary Fund to flag oil as a rising threat to the global economy.

Brent will average $110.30 a barrel this year, according to a Reuters monthly oil poll, up from January's estimate of $107.30 due to fears of a loss of Iranian supplies.

TIGHTER SUPPLY

Apart from Iran, oil markets are already coping with a disruption in shipments from smaller producers such as South Sudan, Yemen and Syria.

More than 1 million barrels per day (bpd) of supply is estimated to be offline - 1.1 percent of daily world demand - including Libyan output yet to return after the virtual shutdown of its oil sector during its 2011 civil war.

"Clearly, the oil market is rather tight," said James Zhang, energy analyst at Standard Bank, in a note. "However, the feared major supply disruption, caused by possible events such as a closure of the strait of Hormuz, remains a small probability."

Investors are worried that higher oil prices will hammer demand in the eurozone as it struggles to emerge from the sovereign debt crisis.

On Monday, ratings agency Standard & Poor's cut Greece's long-term ratings to 'selective default' in a widely expected move.

In the United States, January durable goods orders dropped 4 percent, more than economists' forecasts for a 1.0 percent fall, and the biggest drop since January 2009.

The market is now looking to a second tranche of liquidity from the ECB on Wednesday as part of its Long-Term Refinancing Operation (LTRO), which is helping to keep oil markets buoyant.

Zhang noted that the ECB's first tranche had been widely credited for the market rally in many risky assets which started at the end of 2011.

"I don't see a sharp correction given the supply side risks and the huge amount of liquidity in the market," added Commerzbank's Fritsch.

The market is estimating that about 500 billion euros will be injected by the ECB, but Fritsch said some estimates ranged up to 1 trillion euros. "If some of that money flows into commodity markets, that will push up prices," he said.

(Additional reporting by Manash Goswami in Singapore, editing by William Hardy)

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