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Oil slides on Italy debt worries

Italy debt problems dent sentiment; Poll shows euro zone nearing double-dip recession; Iran standoff lends some support

November 10, 2011 11:00 by

Oil fell $2 on Wednesday, pressured by European debt worries as the cost of Italian bonds reached dangerously high levels, intensifying fears about the global growth outlook.

A fall in US inventories provided a slight boost, but overall economic worries were the main focus for investors.
Italian 10-year bond yields rose well above the 7 percent level that is widely deemed unsustainable, leading to sharp falls in equities and lifting the dollar against the euro.

Oil, dependent on the health of the global economy, retreated after four straight sessions of gains.

Brent crude fell $2.64 to a low of $112.36, recovering to $113.00 a barrel by 1540 GMT. It reached its highest close since Sept. 15 on Tuesday. US crude fell $1.67 to $95.13.

“People are scared that Italy’s too big to bail out,” said Michael Hewson, analyst at CMC Markets. “It’s driving people out of risky assets and it’s reinforcing fears about a double-dip recession, which will hit demand sensitive assets like oil.”

The EIA’s weekly status report showed crude stocks were down 1.4 million barrels on Octber to 338.1 million barrels, missing expectations of a 400,000-barrel increase, proving mildly supportive to US light crude.

Also providing some support to the oil market, Britain’s Foreign Secretary William Hague said the government is looking at imposing further sanctions against Iran’s financial and energy sectors because of its nuclear work.

This saw the premium of prompt to longer-dated contracts — known as backwardation — shrink, as some investors priced in a higher probability in coming months that oil would soar in the event of tighter sanctions or even a strike on Iran.

The premium of December Brent to May Brent — known as a 6-month spread — stood at $2.8, down from $3.7 on Monday and as high as $7 in mid October.

German Chancellor Angela Merkel said Europe’s plight was now so “unpleasant” that deep structural reforms were needed quickly, calling for changes in EU treaties to accelerate and deepen integration of the euro zone countries.

There is now a 60 percent chance of a euro zone recession, according to the consensus of 250 economists, up sharply from 40 percent in a Reuters poll conducted in October.

Europe’s sovereign debt crisis was cited by OPEC as a risk to expectations for demand growth in the producer group’s 2011 World Oil Outlook.

Sketching a more bullish picture for the outlook on oil prices was the International Energy Agency’s World Energy Outlook which said global demand would rise to around 99 million barrels per day by 2035, with the possibility of prices rising to $150 in the near term.

But it said short-term pressures on oil prices were easing as global economic growth slowed and Libyan oil began to return to the market. (By Simon Falush and Philip Baillie; Additional reporting by Francis Kan in Singapore; editing by Jason Neely)

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