London: Brent crude dropped below $117 a barrel on Monday on growing fears of a possible sovereign debt default on either side of the Atlantic and as another potential emergency stock release from the International Energy Agency (IEA) weighed on prices.
Brent crude futures fell 97 cents to $116.29 a barrel at 1:45pm, after touching a low of $116.12 earlier in the session, while US crude fell 47 cents to $96.77 a barrel.
Oil prices reversed Friday’s gains as nervous investors took refuge in gold, which hit record highs in Canadian dollars and South African rand on Monday after earlier touching an all-time high in dollar, euro and sterling terms.
Policymakers on both sides of the Atlantic have offered no clear solutions to markets on their respective debt problems, forcing investors into perceived ‘safe havens.´
In Europe, 8 of 90 banks failed “stress tests” performed to determine if they could withstand a long recession. Expectations were for up to 15 banks to fall short.
The better-than-expected results of the stress test failed to dispel the broader gloom sweeping markets.
“This week, we think market focus will remain on both the US debt talks, but perhaps more importantly, on what the EU leaders decide to do about the various ‘fires´ around them when they meet on Thursday,” MF Global analysts said.
German Chancellor Angela Merkel called on Sunday for private investors to make a major contribution to bailing out Greece, as pressure rose for radical action to cut the country’s debt burden.
“The lingering debt ceiling crisis in the US is not as serious, as in a worst case scenario, politicians will make only marginal cuts and run for cover, thus providing themselves with ‘the out´ they need in order to raise the debt ceiling,” MF Global added in a note.
Republican and Democratic senators sought on Sunday to craft a plan that could avert an unprecedented default by the top oil consumer Unites States while making modest cuts in the deficit.
But there were few signs of progress as the 2 August deadline to avoid a default drew dangerously close.
Failure to increase the debt ceiling by then could send shock waves through global financial markets and may plunge the United States into another recession, economists have warned.
Global consumer confidence fell in the second quarter to its lowest level in a year and a half as an uncertain economic outlook, a deepening euro zone debt crisis and rising inflation made people more cautious, a survey showed.
But confidence was lowest in euro zone countries engulfed by the debt crisis with Greece coming bottom of the global ranking, it said.
The IEA, which needs the backing of all 28 members if it is to pour more oil on a volatile crude market, is expected to confer with its member countries by July 23 to decide whether to draw further on emergency oil stocks.
Last month, member countries released 60 million barrels, only the third such move in the IEA’s history.
The IEA stock release had driven Brent prices down to $102.28 on 27 June, but now prices are at a similar level to where the front-month contract was trading when the Organization of the Petroleum Exporting Countries failed to agree on a collective output increase on 8 June.
“It is too early for the IEA to release stocks for the second time within such a short time,” said Serene Lim of ANZ bank. “In the previous release, there were some countries that were not producing or releasing the stipulated amount.”