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Mon 23 May 2011 10:04 AM

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US crude falls below $100 on euro debt fears

Brent dips below $112 a barrel as investors favour dollar over new euro zone debt fears

US crude falls below $100 on euro debt fears
LIQUID GOLD Oil prices were also hit by expectations of lower oil demand from Europe as a volcanic eruption threatens air travel disruption (Bloomberg Images)

US crude slipped below $100 a barrel on Monday as investors flocked to the dollar on renewed concerns over the euro zone debt crisis.

"The dollar is definitely the driving factor as the market is looking for a new direction following the sharp correction earlier this month," said David Cohen, director of Asian Economic Forecasting at Action Economics in Singapore.

US crude futures for July fell 97 cents to $99.13 by 0242 GMT, after falling by over a dollar earlier, while Brent crude for July was down 78 cents to $111.61 a barrel.

The dollar index , measuring the greenback against a basket of currencies, rose as much as 0.7 percent to its highest since March 30 after the euro extended its losses, making dollar-denominated crude more expensive for consumers using other currencies.

On Friday, Fitch Ratings cut Greece's debt ratings by three notches, pushing the country deeper into junk, while its rival Standard & Poor's cut its outlook for Italy to "negative" from "stable" on Saturday, in a sign that the continent's problems were escalating rapidly.

Oil prices were also hit by expectations of lower oil demand from Europe as a volcanic eruption threatens air travel disruption.

Ash from a massive plume of smoke from an eruption of Iceland's most active volcano could spread south to parts of Europe next week, but experts on Sunday still hoped the impact on air travel would be limited.

Brent is expected to rise towards $118 per barrel, while US crude remains neutral within a range of $95.26-$100.99 per barrel, but is biased to rise to $104.60, said Reuters market analyst Wang Tao.

Strong demand from China and a weakening dollar are expected to support oil prices in the longer term, analysts said.

China is bracing for its worst power shortage since 2004, which has led to it clamping down on diesel shipments.

"With the oil market already in deficit, incrementally higher Chinese demand over the summer could create an extra layer of strength," said Barclays Capital in a research note.

Analysts also expect the greenback to come under pressure again as US interest rates continues to remain low compared to those in other countries.

"Assuming the Europeans can get their act together, and US interest rates stay below those in other economies, the dollar should weaken, and that will be supportive of oil prices," said Cohen.

Persistent tensions in the Middle East continue to put a floor under prices, analysts said.

Yemeni president Ali Abdullah Saleh refused to sign an agreement on Sunday to step down, the third time such a deal has fallen through at the last minute, despite pressure from Gulf Arab and Western mediators.

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