Brent crude remained steady above US$108 a barrel on Tuesday on concerns the Cyprus bailout could set a new precedent in restructuring the euro zone banking sector, again feeding worries about the European economy and its demand for oil.
Jeroen Dijsselbloem, head of the Eurogroup for euro zone finance ministers, said the Cyprus bailout represented a new template for resolving regional banking problems and other nations might have to restructure banking sectors to adapt.
His comments caused the euro to reverse initial rallies and suffer heavy losses early in Asia on Tuesday, weakening demand for dollar-denominated commodities from buyers holding the European currency.
"The process itself is a reminder that there is still a lot of risk in Europe," said Ric Spooner, chief market analyst at CMC Markets. This seemed to be a "matter of short-term crisis management by politicians and the conflicting interests of different credit nations were in evidence," he added.
Brent crude futures slipped eight cents to US$108.09 a barrel by 0727 GMT, but off an earlier session high of US$108.30. US crude increased by 23 cents to US$95.04.
While the Cyprus bailout removed the immediate risk of a financial meltdown that could have ejected the Mediterranean island from the euro zone, investors remained worried about more potential problems for the country and euro zone.
"That sort of conflict of interest, which could have caused the Cyprus situation to get out of control, and that kind of risk, is still very much with us in Europe," Spooner said.
After reaching an 11th-hour deal with the European Union, the European Central Bank and the International Monetary Fund to shut down the country's second largest bank in return for 10 billion euros (US$13bn) in rescue funds, the president of Cyprus assured citizens the deal was in their best interests.
But banks will remain closed until Thursday and even then subject to capital controls to prevent a run on deposits.
Oil prices were also kept in check after Saudi Arabia's oil minister, Ali al-Naimi, said on Monday a price around US$100 a barrel was reasonable for consumers and producers, highlighting the top crude exporter's preferred range.
Brent prices in mid-February pushed above US$119 a barrel to their highest level this year, before pulling back on economic concerns and improving North Sea supply.
Investors are now watching to see if the strength in the US dollar will be sustained and what happens with US oil inventories later in the day, Spooner said.
Brent's premium to US crude was trading at US$13.04 a barrel by 0727 GMT on Tuesday, after narrowing to US$12.85 in the previous session, the narrowest since early July.
"From a fundamental perspective, a further narrowing will be tricky to achieve in the short term as certain volumes of light-sweet crudes require a (WTI-Brent) spread of around -US$15 to be viable for rail transport in the long run," JBC Energy analysts wrote in a note.
"However, as markets tend to overshoot, it is possible that the spread will attempt to test last year's highs, which were around -US$11."
US commercial crude oil stockpiles are forecast to have increased by 1.1m barrels last week on an expected rise in imports, ahead of weekly industry data later in the day, a preliminary Reuters survey of analysts showed on Monday.
Gasoline and distillate inventories are forecast to have slipped by 1.2m barrels each.
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