Oil prices drop by $2
Fitch cut Greece’s debt rating by three notches on Friday, pushing the country deeper into junk and sending investors out of the euro and equities and into gold.
“The dollar is the key factor driving prices now,” said Serene Lim, commodities analyst with ANZ Bank in Singapore. “We saw the euro continue to slip after Greece’s debt rating was cut last Friday and that’s been negative for oil.”
The dollar index rose by almost 1 percent, making dollar-denominated crude more expensive for consumers using other currencies.
U.S. crude futures for July fell $2.26 to $97.84 by 3:24 a.m. EDT, while Brent crude for July was down $2.39 to $110.00 a barrel.
Standard & Poor’s cut its outlook for Italy to “negative” from “stable” on Saturday, which with the Fitch downgrade showed that the continent’s problems were escalating rapidly.
Oil prices were also hit by expectations of lower 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 toward $118 per barrel, while U.S. crude remains neutral within a range of $95.26-$100.99 per barrel, but is biased to rise to $104.60, says Reuters market analyst Wang Tao.
DEMAND STILL STRONG
Strong demand from China is 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 Barclay Capital in a research note.
Persistent tensions in the Middle East and worries about the possibility of further supply disruptions continue to keep a floor under oil prices, analysts said.
Tunisian Foreign Minister Mold Kefir said on Monday he believed Libyan Oil Minister Shoer Ghana was no longer working for the Gaddafi regime, contradicting earlier claims by the government in Tripoli that he was on an official trip to Tunisia, Europe and Egypt.
Yemeni President Ali Abdullah Sale 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.
Uncertainty over pan-Arab protests and Libya’s conflict pushed Brent to a 32-month peak last month, before a sharp correction in early May resulted in prices registering their largest ever weekly decline of more than $16 a barrel.
But an expected increase in output from Iraq later this year could help mitigate any loss in supply due to the geopolitical tensions.
Iraq expects output from its southern oil-fields to hit up to 2.5 million barrels per day at the end of this year from around 1.92 million bud now, the head of South Oil Co. (SOC) told Reuters on Saturday.