Oil falls to $123, supply fears easing

LONDON Tue Mar 6, 2012 7:28pm IST

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An attendant prepares to refuel a car at a petrol station in Rome January 4, 2012.

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LONDON (Reuters) - Oil eased towards $123 a barrel on Tuesday, as higher flows from Iraq and Saudi Arabia offset concern that sanctions on Iran would disrupt supply and push up oil prices.

At the same time, question marks over demand for oil were raised after politicians in China and the euro zone conceded the pace of economic growth would slow.

Brent crude fell 58 cents to $123.14 a barrel by 1226 GMT after climbing to a daily high of $124.39. U.S. crude slid 60 cents to $106.12.

Lingering concerns over supply risks stemming from Iran's nuclear programme seem to have been soothed after top exporter Saudi Arabia recently increased output and Iraq raised its production to a multi-decade high, analysts said.

"We still have ongoing supply disruptions in Sudan, Syria and Yemen ... but as we turn into the second quarter and the maintenance period for refiners which comes with a decline in crude demand, we are seeing an increase in crude supply elsewhere - meaning non-OPEC supply growth and increased OPEC production," said Harry Tchilinguirian, head of commodity market research at BNP Paribas.

Since the U.S. tightened sanctions against Iran, Saudi Arabia has increased output and Iraq on Monday announced its oil production had exceeded 3 million barrels per day for the first time in over 30 years.

SUPPLY RISK

But Israel's hostility to Iran's nuclear programme is still keeping oil markets on edge.

Israeli Prime Minister Benjamin Netanyahu showed no sign of backing away from possible military action against the OPEC member after a meeting with U.S. President Barack Obama on Monday.

The International Atomic Energy Agency (IAEA) raised the alarm over Iran's nuclear work on Monday, saying there were indications of activities at Parchin, an Iranian military site its inspectors want to visit.

Tehran said on Tuesday it would give the U.N. nuclear watchdog access to Parchin. It did not give a date for such a visit.

"On the one hand, the market is trading already on the expensive side. Given mixed economic data, the upside potential for prices from here should be limited," said Tobias Merath, head of Global Commodity Research at Credit Suisse Private Banking.

"At the same time, geopolitical risks are a growing concern, preventing prices from easing. Overall, we think price risks are slightly skewed to the upside due to strong technical momentum and a positive trend."

SLOWER GROWTH

Investors are also watching out for China's industrial output, investment and retail sales data due on Friday to see how the world's second-largest economy is weathering the global downturn.

Beijing cut its 2012 economic growth target to an eight-year low of 7.5 percent from its long-standing annual goal of 8 percent, raising the specter of slower oil consumption.

Evidence of sluggish demand in top consumer the United States could emerge later on Tuesday. U.S. crude oil stockpiles have risen for three straight weeks. The weekly report from the American Petroleum Institute is due later on Tuesday.

(Additional reporting by Jessica Jaganathan in Singapore; editing by Keiron Henderson)

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