Oil falls on euro zone worry, fading stimulus hope

NEW YORK Tue Jun 19, 2012 2:44am IST

A worker collects crude oil sample at an oil well operated by Venezuela's state oil company PDVSA in Morichal July 28, 2011. REUTERS/Carlos Garcia Rawlins

A worker collects crude oil sample at an oil well operated by Venezuela's state oil company PDVSA in Morichal July 28, 2011.

Credit: Reuters/Carlos Garcia Rawlins

NEW YORK (Reuters) - Brent crude prices fell on Monday to 16-month lows as pressure from the broad euro zone debt crisis and fading expectations for coordinated central bank action erased gains derived initially from the pro-bailout election result in Greece.

Spanish bond yields reached euro-era highs, reminding investors that the region's economy remains stressed, even as political parties in favor of Greece's international aid package held talks to form a government.

After recent production hikes by Saudi Arabia that OPEC attempted to address at a policy meeting last week, a well-supplied global oil market kept feeding bearish sentiment even with the European Union's embargo of Iranian oil set for July.

U.S. stock indexes finished mixed, with the technology-propelled Nasdaq logging the noticeable gain, while the Dow Industrials fell and the broader S&P 500 managed only a 0.14 percent gain. .N

The euro fell from a one-month high against the dollar, and the strength of the U.S. currency .DXY also provided pressure on dollar-denominated oil prices. <USD/>

"The selloff after the initial rally was because last week's strength was on the news that central banks would have a coordinated response to the Greece election and now the hope for more stimulus or liquidity has faded," said Phil Flynn, an analyst at Price Futures Group in Chicago.

Brent futures are down 25 percent since early March as signs of slowing economic growth, Europe's escalating debt crisis and the restart of dormant talks over Iran's nuclear program combined to help pull prices back from a 2012 peak over $128.

Brent August crude fell $1.56 to settle at $96.05 a barrel, having traded to a one-week peak at $99.50 before retreating to $95.38.

Brent's settlement and intraday low were the lowest for front-month futures since January 2011.

After gaining the previous two sessions, U.S. July crude slipped 76 cents to settle at $83.27 a barrel, having dropped as low as $82.04 after reaching $85.60.

The U.S. July crude contract expires on Wednesday.

Brent trading volume slightly outpaced U.S. turnover, but trading for both contracts trailed 30-day averages.

Brent's premium to U.S. crude slipped to $12.45 a barrel based on August settlement prices.

Leaders from the Group of 20 countries meeting in Mexico will press Europe to take bold action to combat the region's debt crisis, according to a draft communiqué prepared for the two-day summit.

German Chancellor Angela Merkel said a new Greek government must meet commitments. Merkel told reporters at the G20 meeting that any loosening of agreed reform pledges would be unacceptable.

"There is real doubt emerging whether the Fed will do much on Wednesday and with the comments from Merkel it's hard to find a shimmer of bullish news," said John Kilduff, partner at Again Capital LLC in New York.

The U.S. Federal Reserve's two-day policy meeting starts on Tuesday, after weak U.S. economic data late last week fueled hopes of some investors that the Fed will be spurred toward another round of monetary easing to combat a slowing recovery.

IRAN TALKS DAY 1

Tense negotiations between Iran and world powers in Moscow to address Tehran's disputed nuclear program, remained supportive to oil prices.

Six world powers and Iran made little progress on the first of two days of talks on how to end a decade-long dispute over Tehran's nuclear program and avert another war in the oil-rich region.

"We had an intense and tough exchange of views," said Michael Mann, spokesman for European Union foreign policy head Catherine Ashton, who leads the delegation on behalf of the six powers: the United States, China, Russia, France, Britain and Germany.

The European Union's embargo on Iranian oil is set for July 1. Tightening U.S.-led sanctions have already helped cut Iran's crude oil exports by an estimated 40 percent this year, according to the International Energy Agency.

Iran's nuclear program negotiations took place amid the violent turmoil in Syria, a suspended parliament in Kuwait and a new crown prince in Saudi Arabia after the death of Crown Prince and Interior Minister Nayef on Saturday.

WILL OPEC CUT

After last week's OPEC meeting in Vienna, analysts and investors await evidence of the production and export reductions necessary to bring the group back under its target quota.

OPEC will reduce output to adhere to its 30 million barrels per day production ceiling and the effects should be seen in July, OPEC Secretary-General Abdullah al-Badri said last week.

(Additional reporting by Gene Ramos in New York and Jessica Donati in London; Editing by Bob Burgdorfer, Dale Hudson and David Gregorio)

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