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Oil plunges on EU debt crisis impact

London, June 12, 2012

Crude oil futures fell below $98 a barrel on Tuesday, extending losses due to fears that the euro zone debt crisis will worsen and hurt the global economy, threatening growth in oil demand.

Optimism over a bailout for Spain's troubled banks faded because of concerns about the package's impact on public debt, while uncertainty surrounding elections in Greece on Sunday compounded worries the financial crisis in Europe will deepen.

European shares turned negative on Tuesday and the euro was flat, little changed at $1.2504 .

Brent crude futures slipped 76 cents to $97.33 by 0954 GMT. Earlier in the session, prices fell as low as $96.62 a barrel, close to this year's low of $95.63 struck on June 4.

US oil was down 52 cents at $82.18 a barrel after hitting a one-year low at $81.07.

'Europe is significantly affecting the growth outlook and, given China is already weak, further deterioration in the Eurozone crisis could tip the global economy into a recession,' said Guy Wolf, macro strategist at Marex Spectron.

'Despite that, the supply side in Energy does not look particularly bearish and the 'Iran premium' has been largely priced out.'

Crude futures had rallied more than $2 on Monday on the news that euro zone finance ministers agreed to lend Spain up to $125 billion to tackle the problems of debt-stricken banks. But doubts about the deal emerged overnight, rekindling concerns that Madrid's financial woes would worsen.

The EU has already begun discussing contingency plans for a Greek exit, including withdrawal limits at bank automated teller machines.

Cyprus, which is heavily exposed to Greece, said on Monday that before the end of this month it may become the fifth member of the currency bloc to apply for an international bailout.

Opec target

Oil is also under pressure following comments top oil exporter Saudi Arabia intends to keep production at current levels, despite a recent fall in crude prices.

Saudi Arabian Oil Minister Ali al Naimi said on Tuesday he was happy with Opec's current oil output target.

'It is a data heavy week with the Opec meeting and the IEA (International Energy Agency) monthly report. Opec is expected to yield little change, though usually with this type of oil price fall, they cut. Weaker China data could also change IEA oil demand projections.' said Tobias Merath, head of private banking commodity research at Credit Suisse.

Comments by Naimi were at odds with the assessment by Iraq's Opec president, Abdul Kareem Luaibi and Venezuela's oil minister Rafael Ramirez that there is a surplus in supplies from the 12-member group.

The Organization of the Petroleum Exporting Countries (Opec) meets on Thursday in Vienna to chart production policy. Supply from the 12-member group, running nearly 2 million barrels per day above a self-imposed production ceiling of 30 million bpd, is at its highest since 2008.

Opec's biggest producer Saudi Arabia has lifted output sharply to 10 million barrels a day, a 30-year high, to prevent inflated fuel prices blocking global growth and to help offset any disruption in supplies from the Middle East associated with sanctions against Iran.

That has partly helped Brent fall from the high of over $128 a barrel for the year touched in March to below $100 a barrel.

The United States has offered respite to some buyers of Iranian oil. The US extended exemptions to India, South Korea, Turkey and four more economies from its tough, new sanctions on Iran's oil trade.

But China was left out, remaining the only major importer exposed to possible penalties at the month's end. Industry data due later today from top consumer the United States will help provide further direction to prices.

US crude supplies were forecast to have fallen last week for the second straight time, due to lower imports, a preliminary Reuters poll showed. -Reuters




Tags: Oil | Debt crisis |

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