Brent crude slipped below US$110 per barrel on Wednesday, weighed down by worries that a fragile global economy would cut oil demand, although supply disruption risks amid rising tensions between Iran and Western nations kept losses in check.
Big anti-austerity protests in Spain reignited fears about the three-year-old debt crisis in the euro zone, while more profit warnings by US companies, including heavy equipment maker Caterpillar, showed how the global slowdown is slashing corporate earnings.
Economic worries “might be putting the brakes on gains in crude,” said Ben Le Brun, markets analyst with OptionsXpress in Sydney.
“The premium on the Iran situation doesn’t seem to be built into prices, so the focus till the end of the year will be on developments in Iran with an eagle eye on economic data.”
Front-month Brent futures fell 65 cents to US$109.80 a barrel by 0518 GMT, their second drop in three days.
US crude fell 59 cents to US$90.78 per barrel, not far off Tuesday’s trough of US$90.57, its weakest in almost two months.
Both contracts are headed for their first monthly decline in three, surrendering gains from earlier this month when both reached four-month highs as a commodity-wide rally fed by efforts of central banks from US and Europe sputtered, putting investors’ focus back on a shaky global economy.
US data released on Tuesday showed home prices rising for a sixth straight month in July as well as a jump in consumer confidence. But on the same day Caterpillar joined FedEx Corporation and Norfolk Southern in cutting its profit estimates, citing sluggish demand.
Although the US housing sector has regained its footing, the broader economic recovery in the world’s top oil consumer has lost traction. The US economy grew at a 1.7 percent annual rate in the second quarter, and economists say it is not likely to fare much better in the current quarter.
In Spain, protesters clashed with police in the capital on Tuesday as the government prepared a new round of unpopular austerity measures for the 2013 budget to be announced on Thursday.
Spain is at the centre of the euro zone debt crisis over concerns the government cannot control its finances and those of highly indebted regions, bitten by a second recession since 2009 which has put one in four workers out of a job.
Investors also remain preoccupied with slow demand in China, the world’s second-biggest oil consumer, as smaller firms, the key driver of economic growth and job creation, remain starved for cash as banks still favour large, state-backed companies.
“With global growth looking weaker, we doubt whether the steps taken recently in Europe, the US or China add up to being a real “game changer” for many commodities,” Barclays analysts said in a report.
Despite Wednesday’s drop, oil prices remain supported by rising tensions in Iran and worries of supply cuts from the key seller of crude to Asia.
US President Barack Obama on Tuesday told the United Nations General Assembly the country would do what it must to prevent Iran from obtaining a nuclear weapon – the latest in a series of exchanges over Iran’s disputed nuclear programme.
The US and European nations have imposed sanctions on Iran’s oil shipments to register their opposition to its nuclear research, which the Middle Eastern nation insists is for peaceful purposes.
The day before Obama’s speech, Iranian President Mahmoud Ahmadinejad indulged in his own rhetoric against Israel, which has hinted that it could strike Iran’s nuclear sites.
Heightening the tensions, Iran Press TV said on Monday the nation had successfully tested a domestically made anti-aircraft system.
“US sanctions against Iran are set to get tougher,” Deutsche Bank analysts said in a report on Wednesday.
“The move is expected to discourage foreign banks from engaging in business with [the National Iranian Oil Company]. The combined impact of the US and European sanctions has disrupted more than 1m bbl/day of crude oil exports, or half of Iran’s total oil exports, according to our estimates,” they added.
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