(Reuters) - Oil prices fell for a second straight session on Wednesday, with Brent staying under $107 per barrel, as risk aversion gripped markets after Spain's credit rating downgrade stoked fears of a worsening euro zone crisis denting demand outlook.
A shaky euro, which hit a near two-year low versus the dollar after Egan-Jones Ratings cut Spain's credit rating for the third time in less than a month, also dragged down oil prices. A stronger dollar makes commodities priced in the greenback more expensive for holders of other currencies.
There is definitely renewed concerns of a contagion in the euro zone with the debt crisis, there is real pressure now on Spain's banks, it's a crisis of confidence, said Ric Spooner, chief market analyst at CMC Markets.
Brent crude eased 35 cents to $106.33 per barrel by 0231 GMT, heading for the biggest monthly drop in two years, while U.S. crude fell 40 cents to $90.36.
U.S. crude was on track for a more than 13 percent drop this month, also the biggest monthly decline since May 2010, with a surge in domestic stockpiles weighing on prices.
Crude stocks at Cushing, Oklahoma storage hub, delivery point of the U.S. crude oil future contract, have risen to a record high of 46.8 million barrels.
However, oil price losses may be checked by supply concerns as Iran's dispute with the West over Tehran's nuclear program remains unresolved and easing worries about a messy Greek exit from the euro zone after an opinion poll showed leads for Greece's pro-bailout conservatives.
EU leaders have warned Greece of the consequences of renouncing the bailout, saying they will pull the plug on funding - a move that would lead to rapid bankruptcy and an ignominious exit from the single currency.
Honestly at the moment there doesn't seem to be an adequate contingency in dealing with Greece, Spooner said.
A drop in oil prices was limited by concerns over rising tensions between Iran and the West after talks failed to resolve a dispute over the Islamic republic's nuclear program last week.
Iran continues to remain a significant factor but for the moment with a short to medium term outlook the focus is on Europe and the demand side picture if the crisis continues to deteriorate, Spooner said.
Tehran is refusing to grant United Nations inspectors access to a facility at Parchin which is suspected of being used to develop nuclear weapons. Iran says its aims are entirely peaceful.
Iran has ramped up its production of low-enriched uranium, in the last five years and it could be used for at least five nuclear weapons if refined further, the U.S.-based Institute for Science and International Security (ISIS) said.
(Editing by Himani Sarkar)