Ongoing debt crisis weighs on oil

Brent crude fell below $117 a barrel today as the ongoing debt crises in Europe and the United States kept skittish investors away from risky assets, while the possibility of a second IEA oil release also weighed on sentiment.

Brent crude futures fell 97 cents to $116.29 a barrel at 0815 GMT, after touching a low of $116.12 earlier in the session, while US crude fell 47 cents to $96.77 a barrel.

Oil prices reversed Friday's gains as nervous investors took refuge in gold, which hit record highs in Canadian dollars and South African rand on Monday after earlier touching an all-time high in dollar, euro and sterling terms.

Policymakers on both sides of the Atlantic have offered no clear solutions to markets on their respective debt problems, forcing investors into perceived 'safe havens.'

The IEA stock release had driven Brent prices down to $102.28 on June 27th, but now prices are at a similar level to where the front-month contract was trading when the Organization of the Petroleum Exporting Countries failed to agree on a collective output increase on June 8th.

"It is too early for the IEA to release stocks for the second time within such a short time," said Serene Lim of ANZ bank. "In the previous release, there were some countries that were not producing or releasing the stipulated amount."

Republican and Democratic senators sought yesterday to craft a plan that could avert an unprecedented default by the top oil consumer Unites States while making modest cuts in the deficit.

But there were few signs of progress as the August 2nd deadline to avoid a default drew dangerously close.

Failure to increase the debt ceiling by then could send shockwaves through global financial markets and may plunge the United States into another recession, economists have warned.

In Europe, eight of 90 banks failed "stress tests" performed to determine if they could withstand a long recession. Expectations were for up to 15 banks to fall short. But the better-than-expected results of the stress test failed to dispel the broader gloom sweeping across markets.

"The market continues to focus around issues of sovereign debt and the raising of the US debt ceiling," said Ben Westmore, a commodities analyst at National Australia Bank.

Global consumer confidence fell in the second quarter to its lowest level in a year and a half as an uncertain economic outlook, a deepening euro zone debt crisis and rising inflation made people more cautious, a survey showed.

But confidence was lowest in euro zone countries engulfed by the debt crisis with Greece coming bottom of the global ranking, it said.

German chancellor Angela Merkel called yesterday for private investors to make a major contribution to bailing out Greece, as pressure rose for radical action to cut the country's debt burden.

With debt issues at the forefront, investors put the persisting political unrest in Syria and Yemen behind them.

Syrian tanks had surrounded a town near the border with Iraq's Sunni heartland on Sunday after thousands of people, emboldened by defections among security forces, took to the streets there denouncing president Bashar al-Assad.

In Yemen, forces backed by armed tribesmen launched an offensive to retake Zinjibar, capital of southern Abyan province, officials said yesterday, after months of fighting with Islamist militants who seized the city.

Dozens have been killed and some 54,000 civilians have fled Abyan, which has descended into daily bloodshed as the army confronts militants the government says have ties to al Qaeda.

Reuters