Brent crude slipped below $112 today, reversing some of the previous session's gains on worries that new governments in Greece and Italy may fail to muster political clout to impose unpopular reforms and contain the region's debt crisis.
Oil markets are looking for clues on demand growth from Europe, with Italy due to unveil a technocrat-led cabinet and a new Greek coalition expected to win a confidence vote. Asian shares fell because of the uncertainty and the euro hit a five-week low.
Brent crude slipped 68 cents to $111.50 a barrel by 7.48am, while US oil fell a steeper 79 cents to $98.58 due to a surprise build in crude stocks in the world's largest oil consumer, the United States.
"The market is divided between fundamental and speculative factors," said Caren Seren Varol, a risk manager at Global Risk Management. "The speculation is about Europe and on the fundamental side we have rising Asian demand and US data turning more and more positive. The United States may not post amazing growth but the chance of a recession is less."
US retail sales rose and wholesale prices fell in October and a gauge of New York state manufacturing showed growth in November, bolstering hopes for a stronger fourth quarter and sending US crude to a 16-week peak in the previous session.
Data showing the German and French economies managed to expand in the third quarter added support.
Yet Japan, the world's third-biggest economy, toned down its economic assessment and its central bank warned that Europe's sovereign debt crisis may hurt the global economy.
"The debt crisis seems to be spreading from peripheral euro zone countries to core euro zone countries, such as France," said Ben Le Brun, market analyst at OptionsXpress.
France has become the latest euro zone member to come under pressure after a spike in its borrowing costs on jittery bond markets fuelled concerns the region's second-biggest economy was also being sucked into the spiralling debt crisis, besides nations like Italy and Spain.
"Italian and Spanish bond yields continue to be watched by traders around the globe for clues as to whether we can breathe a sigh of relief, or conversely, raise the state of alarm," Tim Waterer at CMC Markets said in a report.
Oil is also getting support from growing supply concerns, with tensions escalating over Iran's nuclear programme. Western states will try this week to overcome divisions with Russia over a UN nuclear report on the Middle East nation, hoping to show big power unity that will pile pressure on Tehran to address growing fears it wants atomic bombs.
Oil prices currently command a risk premium of about $4-$5 a barrel because of Iran, Mr Le Brun said.
US crude prices are getting weighed down by data from the American Petroleum Institute showing that oil inventories unexpectedly rose 1.3 million barrels in the week to November 11th, versus analysts' expectations for a drawdown of 1.2 million.
Reuters
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