Oil edges towards $121

Wed, Feb 22, 2012, 00:00

Brent crude edged down towards $121 today, retreating from a nine-month high, as weaker Chinese manufacturing data and resurfacing worries about the euro zone debt crisis cast doubt on global economic health and prospects for fuel demand.

China's manufacturing sector contracted in February for a fourth straight month as new export orders dropped sharply in the face of the euro area debt crisis, stirring fears about fuel demand in the world's second largest oil user.

Commodities rallied yesterday after the European Union approved a €130 billion rescue fund to Greece, saving it from bankruptcy. But the long-term risk of a messy default and regional contagion, given deep-rooted mistrust over Athens' commitment to harsh reforms, continued to worry investors.

Brent crude for April delivery fell 14 cents to $121.52 a barrel by 0734 GMT. The contract settled at $121.66 yesterday, its highest since May.

US crude for April was up 7 cents to $106.32 a barrel. The March contract, which expired yesterday, closed at $105.84 a barrel, the highest settlement for front-month NYMEX crude since May 4th.

"Prices are correcting as we've already got the boost from Greece and Iran's pre-emptive stoppage of oil to Britain and France," said Tony Nunan, a risk manager at Mitsubishi Corp, adding that the slowdown in Chinese manufacturing activity also weighed on prices.

Analysts expect China to step up policy easing to support economic growth and lift commodities demand in the world's second largest economy. Commodities rallied at the start of the week after Beijing cranked up credit on Saturday by lowering the amount of cash banks must hold in reserves.

Yet supply concerns have boosted oil prices in the past month on disruptions from Iran, as tightening US sanctions make it tough for buyers to keep doing business with Opec's second largest producer.

Asian and European buyers of Iranian crude are cutting purchases from Tehran. Top Asian consumers of Iranian oil - China, India and Japan - are planning cuts of at least 10 per cent in Iranian crude imports.

Crude output in Sudan, Yemen, Syria and the North Sea is also lower, hurt by geopolitical and production issues.

"Upside price risks are rising as the market finds itself in the unprecedented situation in which Opec spare capacity is at a trough just as a world economic recovery is gaining momentum," Goldman Sachs analysts said in a note.

The UN nuclear watchdog expressed disappointment today over a lack of progress during two days of talks in Tehran over Iran's disputed nuclear programme and said its request to visit a military site had not been granted.

Oil still faces downside risks in the second quarter as refineries undergo maintenance and product consumption slides into a seasonal trough before the northern hemisphere summer, JP Morgan analysts led by Lawrence Eagles said in a February 21st note.

"Supply risks remain elevated, as does the desire to build inventory, but at current rates it appears as if the market will be well-supplied this spring, creating the potential for prices to retrace, rather than collapse," the bank said.

A gradual economic recovery in the United States, the world's largest oil consumer, has also supported prices.

Investors are looking ahead to existing home sales data due later in the day for more signs of recovery that could lift oil prices, Mitsubishi's Nunan said.

Yet high fuel prices may threaten demand.

Gasoline futures ended at their highest level since May, lifted by the idling of BP Plc's Cherry Point, Washington, refinery on Friday due to a fire.

"Motorists on both sides of the Atlantic are feeling the full pinch of exorbitantly high crude oil prices," said Stephen Schork, editor of the energy newsletter the Schork Report.