Oil slumps over $2 as Europe jitters sink stocks

Oil fell more than 2 percent for a third successive day of losses on Monday, tumbling in tandem with other risk assets as European bank and debt jitters and doubts over global growth haunted traders.

Updated: Sep 06, 2011, 09:49 AM IST

New York/London: Oil fell more than 2 percent for a third successive day of losses on Monday, tumbling in tandem with other risk assets as European bank and debt jitters and doubts over global growth haunted traders.

While total trading volume was two thirds below its norm due to the US holiday, sellers showed little hesitation in knocking Brent crude to its lowest in six days after the worst ever reading for Chinese services sector growth added to anxiety fueled on Friday by dismal U.S. jobs data.

The continued closure of more than half the US Gulf of Mexico's crude oil production for a third day offered no visible support to the complex, as companies slowly restored output after the passage of Tropical Storm Lee.

"The background is one of poor economic growth and worries over demand. The euro is under a lot of pressure and equities have been weak all day," said Christopher Bellew, broker at Jefferies Bache in London.

ICE Brent futures for October fell USD 2.25 to USD 109.92 a barrel by 3:30 EDT (1930 GMT), nearing the 200-day moving average support line at USD 109.26. US crude futures dropped USD 2.85 to USD 83.61 a barrel, putting the closely watched Brent/WTI spread at what would be a record close of USD 26.31.

Volume was predictably thin, with Brent crude at only about 40 percent of its average and U.S. trading at 10 percent.

Oil was pulled lower by a drop in the euro, which pushed the US dollar index up nearly 0.6 percent, and a bank-led sell-off in European stocks that knocked the benchmark index down more than 4 percent.

The catalysts were multiple: a regional election rout for German Chancellor Angela Merkel's coalition in a state election on Sunday; an upcoming court ruling over Germany's involvement with the EU bailout fund on Wednesday; and new lawsuits and probes against big banks involved in asset-backed securities.

The mood in Europe was further eroded by data showing China's services sector grew in August at the slowest pace on record, a private survey showed on Monday, as new orders ebbed and tightening measures to rein in an exuberant property sector started to pinch.

Global growth in services came to a virtual standstill last month as new business all but dried up, adding to fears that the world economy is facing a double-dip recession. US service sector ISM data is expected to show the weakest reading since early 2010 on Tuesday.

"Oil is falling on worries over weak demand, unemployment and talk of a double-dip recession," said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt.

Storm watch

In the US Gulf of Mexico, strong winds in the wake of Tropical Storm Lee hindered efforts to restaff and restart oil and gas platforms in the basin, grounding helicopters that would have otherwise ferried workers out to platforms.

Shut crude oil production rose by 1.2 percent on Monday to 858,935 barrels per day after Lee dissipated over the southeastern United States, the government said.

Another storm, Hurricane Katia, intensified over the open Atlantic on Sunday, bulking up to a powerful Category 2 storm, the U.S. National Hurricane Center said, although it appeared to pose little threat to energy facilities with most models showing it veering back out to sea.

Sanctions and recovery

The European Union imposed a ban on purchases of Syrian oil on Saturday and warned of further steps unless President Bashar al-Assad's government ended its crackdown on dissent. The measure was expected to have minimal impact on the oil market as Syria exports only about 150,000 bpd.

In Libya, soldiers supporting the new interim government made ready to storm a town held by loyalists of Muammar Gaddafi, but held off in the hope a surrender would avoid bloodshed.

The EU has lifted sanctions on Libyan ports and oil firms, but output is expected to recover slowly, with many officials expecting it to return to its its pre-war production level of around 1.6 million bpd only in 2013.

Bureau Report