Singapore: Brent crude futures rose above $104 on Friday on worries about supply disruption after the US Congress approved a bill imposing sanctions on Iran’s central bank, limiting buyers’ ability to pay for oil they buy from the Islamic Republic.
Yet gains were capped on fears Europe’s debt crisis would worsen as the region’s leaders struggle to get their respective parliaments to agree to austerity measures.
Investors are worried further delays may engulf the world’s growth engines, with signs already emerging of China feeling the heat.
Brent crude, which rolled over to February as the prompt month, rose 57 cents to $104.17 a barrel by 12:00 pm, after slipping 65 cents to settle at $103.60 a barrel. US crude rose 24 cents to $94.11 a barrel, after falling $1.08 to settle at $93.87.
“The geopolitical tensions surrounding Iran are putting a floor, keeping prices supported at current levels, despite growing worries about the economy,” said Ben Le Brun, market analyst at OptionsXpress. “China can run but can’t hide from what’s going on in Europe.
The fallout will hurt everybody.”
Brent is set to decline 4% this week, its biggest drop since the week ended 20 November, while the US benchmark is set to slip 5.4%, its biggest fall since the week ended 25 September.
Oil markets took wide swings this week, jumping more than 2% on Tuesday on jitters over Iran supplies and threats to key shipping lanes, pushing Brent to a high of $111.10.
Prices plunged more than 4% the next day in a broad commodities selloff triggered by concerns over Europe.
The twin factors of slowing economic growth and worries over constriction of supplies due to simmering tension in the Middle East, will keep the US crude benchmark at around $95 a barrel and Brent at around $105, Le Brun said.
The US Congress on Thursday approved a defense bill that, among other things, imposes sanctions on Iran’s central bank, sending it to President Barack Obama for his expected signature into law.
Plans for fresh US sanctions to isolate Tehran have sent shudders among Asian governments who fear they will have no way to pay for Iranian crude imports and face rising costs to fuel the region’s growing economies.
Japan is in talks with US diplomats about a possible waiver of US legislation that would make it more difficult to pay Iran. South Korea would also seek an exemption if the bill was signed into law.
While these measures threaten to choke off supplies from the world’s fifth-largest oil exporter, investors are also worried about global economic growth worsening.
Italy’s government faces a confidence vote in parliament on Friday, a move to speed approval of a €33 billion ($43 billion) austerity package intended to restore market confidence in the euro zone’s third largest economy.
Reflecting the worsening financial conditions, Fitch Ratings, the third-biggest of the major credit rating agencies, on Thursday downgraded Goldman Sachs, Deutsche Bank and five other large banks based in Europe and the United States, citing “increased challenges” in the financial markets.
The impact of a global economic slowdown on the world’s second-largest oil consumer, China, may be already visible, with the country reporting the first year-on-year drop in foreign direct investment in 28 months.
The HSBC flash manufacturing purchasing managers’ index (PMI), the earliest indicator of China’s industrial activity, stood at 49 in December, a slight rise from November’s 47.7.
“Despite the modest climb, lingering uncertainties on both the domestic and external fronts have kept both output and new orders in a contraction phase,” analysts at JPMorgan said in a report.