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Mon 9 Jan 2012 10:50 AM

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Brent steady near $113; Iran fears offset weak EU data

Iran has threatened to block Strait of Hormuz if the West's sanctions harm Tehran's oil exports

Brent steady near $113; Iran fears offset weak EU data
A stronger US dollar makes commodities priced in the unit more expensive

Brent crude prices steadied around $113 a barrel on Monday as weaker euro zone employment and retail sales data boosted the dollar and dented sentiment, but concerns over Iran's threat to shut a key oil-shipping route capped price falls.

February Brent eased 1 cent to $113.05 a barrel by 0439 GMT. On the New York Mercantile Exchange, February crude was down 57 cents at $100.99 a barrel.

The euro zone's November retail sales fell 0.8 percent, much weaker than a Reuters poll forecast for a fall of 0.2 percent, while the number of unemployed rose for the seventh consecutive month.

The negative news dragged the euro to a 16-month low against the dollar, while the dollar index against a basket of major currencies rose above 81.40 to the highest since September 2010.

A stronger US dollar makes commodities priced in the unit more expensive.

German Chancellor Angela Merkel and French President Nicolas Sarkozy, aiming to align the two powerhouse partners that have driven European integration, will focus on how to boost employment at a meeting later in the day.

"I don't think there are big expectations from the meeting. They have met so many times and achieved nothing," said Ben Le Brun, market analyst at OptionsXpress in Sydney.

Offsetting the impact of gloomy economic news for oil markets was a Friday announcement from Iran of new military exercises in the Strait of Hormuz, a critical shipping chokepoint.

Iranian officials have in recent weeks threatened to block the strait if new sanctions imposed by the United States and planned by the European Union, with the aim of discouraging Iran's nuclear programme, harm Tehran's oil exports.

"The geopolitical concerns are definitely putting a floor on oil prices at the moment. There are no two ways about that," said Le Brun.

The West has plans to use strategic oil stocks to offset most of the 16 million barrels per day (bpd) of crude passing through the waterway should Iran block it, industry sources and diplomats said.

The International Energy Agency (IEA) may release up to 14 million barrels per day (bpd) of government-owned oil stored in the United States, Europe, Japan and other importers, a rate that could be kept up for a month.

Such a release is likely to limit the impact of any blockade of the Strait of Hormuz, which is unlikely to last beyond a few weeks, analysts at Morgan Stanley said in a report.

"If the impact is limited to 10 million bpd for three weeks, or 210 million barrels, this loss could be easily replaced by an SPR (strategic petroleum reserves) crude release until the Strait is reopened," the report said.

Markets will also be affected this week by the reweighting of the world's biggest commodity indexes, the S&P GSCI Index and the DJ-UBS Index.

This could see funds selling off more than $6bn worth of US crude futures and buy up more than $5.4bn of Brent crude, analysts estimate, likely creating short-term tremors in the market.

Expectations of the re-weighting, which was announced two months ago to better reflect market fundamentals, led to the closely watched Brent/WTI spread expanding nearly $3 a barrel last week to near its widest point since mid-November. The spread widened another 58 cents to $12.08 by 0437 GMT.

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