Oil stalls on euro zone downgrade risk

Oil stalls on euro zone downgrade risk

London: Oil prices stalled on Tuesday, paring losses after a broad market fall on the prospect of possible widespread euro zone downgrades by Standard & Poor’s and as tension in major exporter Iran remained supportive.

EU leaders will meet on Friday in a crucial meeting for the euro zone debt crisis, in which investors hope a convincing solution will be agreed upon.

“The cost of not agreeing will be higher than agreeing. But for oil markets, if an agreement is reached there will be a lot of austerity measures and this will affect demand," said Thorbjoern Bak Jensen, an analyst at A/S Global Risk Management Ltd.

Brent crude was up 34 cents at $110.15 a barrel by 1044 GMT, while US crude was up 16 cents at $101.15 a barrel.

The rating agency’s move drew criticism from the European Central Bank, and one council member questioned whether the ratings agency was contributing to the European debt crisis, adding the S&P’s methods had become increasingly political.

Markets were also supported by the euro zone’s economy providing increasing ground for an interest rate cut this week by the ECB, after European statistics agency Eurostat confirmed estimates pointing to weakening growth.

The agency confirmed domestic product (GDP) in the euro zone rose by 0.2% in the quarter, compared to the previous three months.


Diplomats and oil industry sources told Reuters that the prospect of a ban on Iranian crude oil imports to Europe may be fading amid growing sceptisim among members about the effectiveness of sanctions.

But the world’s fifth-largest oil exporter has said it cannot rule out a self-imposed oil embargo to punish the West and the ongoing threat of an interruption in supply has helped keep oil prices supported.

And analysts say the risk of a unilateral strike on Iran by Israel or an escalation of tensions between Tehran and its Arab neighbours remains.

“Iran is just politics, but if something happens, the impact will be high. So even if the overall probability of conflict is low, put together the risk is medium," Jensen continued.

Elsewhere, tensions eased in Syria, where oil exports have already been banned by the EU, after it said it had conditionally approved an Arab League peace plan to end eight months of unrest.


Market participants are also waiting for next week’s OPEC meeting, where the group’s members look set to agree on a new production target that legitimises current cartel output around 30 million barrels a day.

“Today’s elevated oil price is likely to discourage OPEC from cutting, regardless of the rhetoric from Vienna on Dec 14," said analysts at Morgan Stanley in a research note.

Worries about high oil prices were echoed by BP Chief Executive Bob Dudley, who said on Tuesday that high oil prices could derail the fragile economic recovery.

In the United States, crude oil inventories likely fell last week after rising sharply the week before as imports probably dropped, a preliminary Reuters poll of analysts showed on Monday.

On average, US crude stockpiles were expected to have fallen 1.1 million barrels in the week ended 5 December, according to the poll of seven analysts.