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Mon 19 Dec 2011 10:38 AM

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Brent below $103 on North Korea news, EU fears

Prospect of rising tension on Korean peninsula after Kim Jong-il's death pushes dollar higher

Brent below $103 on North Korea news, EU fears
Lingering concerns over the euro zone debt crisis also weighed on oil prices

Brent crude futures fell below $103 on Monday, as the prospect of rising tension on the Korean peninsula following the death of North Korean leader Kim Jong-il pushed the US dollar higher, making dollar-denominated oil more expensive.

Kim died on a train trip, state television reported on Monday, sparking immediate concern over who is in control of the reclusive state and its nuclear programme.

Brent crude fell 70 cents to $102.65 a barrel by 0407 GMT, after the front-month contract fell 4.85 percent last week, its biggest percentage drop since the week to Nov. 18.

US crude was down 66 cents at $92.87 a barrel. The benchmark lost 5.9 percent in the previous week, its biggest percentage weekly loss since the week to Sept 23.

"In light of uncertainties about what would follow after his death and what implications it would have on Asia, the initial reaction is to seek safe-haven in the dollar," said Takao Hattori, an analyst with Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

The greenback rose 0.25 percent against a basket of currencies by 0409 GMT, after trading flat before the news of Kim Jong-il's death emerged.

Lingering concerns over the euro zone debt crisis also weighed on oil prices, but losses were limited by signs China's oil demand would hold up as its economy headed for a moderate slowdown.

Sentiment softened after Fitch Ratings warned on Friday it may downgrade France and six other euro zone countries, saying a comprehensive solution to the region's debt crisis was beyond reach.

Market participants will look to a teleconference of euro zone finance ministers later on Monday for further clarity on plans to deal with the region's sovereign debt crisis.

"The market is still concerned that what's going on in Europe will spread to China, the biggest centre for oil demand growth," said Gordon Kwan, head of energy research at Mirae Asset Management in Hong Kong.

"But China has enough tools to provide more liquidity and avoid a hard landing, which will be bullish for oil prices."

China's housing inflation hit its lowest this year in November, the latest sign that Beijing's efforts to fight rising prices are paying off as it steadily eases monetary policy to ensure a soft landing.

The falling home price, in tandem with November's sharp drop in consumer inflation from July's three-year peak, enables Beijing to tilt its policies more towards safeguarding economic growth, away from its top priority of calming inflation just a few months ago.

China's central bank cut reserve requirements for commercial lenders late last month for the first time in three years, and could do so again later this week, Kwan said.

Market participants will be watching events in Iran this week amid the lingering prospect of sanctions over Tehran's nuclear program choking off supplies from the world's fifth-largest crude oil exporter.

"Markets will be keeping a close eye on developments regarding Iran, but at this stage it hasn't had much impact on prices," analysts at ANZ Bank said in a research note.

Indian companies have begun talks with alternative suppliers to slowly replace Iranian oil, while South Korea set new sanctions on Tehran, banning fresh investment in its oil and gas sectors and blacklisting additional Iranian firms and personnel.

These actions came after the US House of Representatives passed legislation on Wednesday that would expand sanctions on Iran, cracking down on a wider range of energy issues and closing some loopholes in existing energy and financial sanctions.

The threat of a major supply disruption from OPEC's second biggest producer has helped support oil prices in recent weeks.

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