London: Oil fell towards $81 on Tuesday as the dollar gained after a major exchange of artillery fire on the Korean peninsula and as the euro fell on fears Ireland’s debt crisis may lead to problems elsewhere in Europe.
North Korea fired dozens of artillery shells at a South Korean island, setting buildings on fire and provoking a return of fire by the South, Seoul’s military and media reports said.
European stock markets, which financial bookmakers had been calling flat before the Korean news broke, opened down, with the FTSEurofirst 300 down 0.4% and Britain’s FTSE 100 down 0.6%.
US crude for January shed 20 cents to $81.54 a barrel by 2:33pm, after having dropped 71 cents on Monday. ICE Brent was down 9 cents to $83.87 a barrel.
News of the Korean exchange of fire sent US 10-year Treasury futures rising and the Japanese yen falling. The dollar index against a basket of currencies gained around 0.35%.
Oil and commodities often move inversely to the dollar, partly because many of them are priced in the US currency.
“This is a trigger for the ‘risk off´ button. You’ll certainly see selling in risk-based markets like equities and commodities until we get a better read on events,” said Mark Pervan, senior commodities analyst at ANZ in Melbourne.
Jeong My-Young, foreign exchange strategist at Samsung Futures, said the Korean incident prompted investors to close dollar short positions against all currencies.
“This kind of incident can trigger automatic stop-loss selling of non-dollar currencies,” he said.
The euro earlier fell to as low as $1.3524, coming under pressure as political uncertainty in Ireland and worries about other heavily indebted members of the 16-nation bloc snuffed out optimism over a bailout plan for Dublin.
“Further oil market volatility cannot be excluded as Irish domestic political developments may yet slow the negotiation of the aid package with the EU/IMF, and that attention will at some point shift its focus to other euro zone economies,” JPMorgan analysts said in a note.
Irish Prime Minister Brian Cowen defied pressure to quit on Monday, saying he would stay in office until parliament passed an austerity budget needed to secure the IMF/EU bailout, which could total 80 billion to 90 billion euros, and then call an early election.
Hopes of a drawdown in US crude stocks in the week to 19 November, reflecting better demand at the world’s top energy consumer, may support prices.
Industry data from the United States due at 11:00pm, is expected to show a third week of decline for crude inventories following a surprise heavy drawdown in the previous week, a Reuters poll showed on Monday.
Traders are also watching the impact of a disruption to some of Shell’s crude oil production in Nigeria.
Nigerian output of Bonny Light crude has fallen by about 100,000 barrels per day (bpd) to between 210,000 and 220,000 bpd after a damaged pipeline led Shell to declare a force majeure on exports on Friday.
The market is also keeping an eye on the political situation in Saudi Arabia as the country’s ageing King Abdullah arrived in the United States for medical treatment on Monday, while a frail crown prince Sultan hurriedly returned from abroad to govern the world’s largest oil exporter.