Oil below $103 as euro zone weighs

 
on July 24 2012 9:06 AM

Oil slid below $103 on Tuesday after further evidence of damage to Europe's economy countered signs of improvement in China's financial outlook.

The likelihood of the euro zone tipping back into recession grew after the bloc's private sector shrank for a sixth month in July as manufacturing output plunged.

Brent crude was off 44 cents at $102.82 a barrel by 8:03 a.m. EDT (1203 GMT), after reaching $104.26 in earlier trade.

U.S. crude was down 23 cents to trade at $87.91.

Brent fell more than 3 percent on Monday after Spain's central bank said the euro zone's fourth-largest economy sank deeper into recession in the second quarter, stoking fears the country was headed for a bailout.

We started off buoyant after the Chinese data, then the European data wasn't so good, which hit oil, said Rob Montefusco, a trader at Sucden Financial.

The dollar index has firmed up as the euro came off, and I can't see any strength in oil as long as the euro is so weak.

Even Germany, Europe's largest economy, is feeling the chill from the debt crisis. Its private sector shrank for a third straight month in July, suggesting the economy may contract in the third quarter after an expected fall in the second.

Further clouding investor sentiment, Moody's Investors Service changed its outlook for Germany, the Netherlands and Luxembourg to negative from stable and cited an increased chance that Greece could leave the euro zone.

In earlier trade, China, the world's biggest energy consumer, had offered investors some optimism.

Its manufacturing output in July grew at its fastest pace in nine months, helping lift an index of activity in the country's factory sector to its highest level since February and suggesting pro-growth government policies are having an impact.

China is the biggest driver of oil demand and its overall oil appetite does not seem to have suffered so much, as it builds up infrastructure and crude stockpiles, said Tony Nunan, a Tokyo-based risk manager at Mitsubishi Corp.

MIDDLE EAST UNCERTAINTY

Oil found some support from supply worries triggered by turmoil in Syria and tension between Iran and the West over Tehran's nuclear program.

As international pressure continues on President Bashar al-Assad's government, Syria acknowledged on Monday that it had chemical and biological weapons and said it could use them if foreign countries intervened in its civil war.

The risks of escalation of the conflict in Syria, we think, will continue to limit the extent of any bearish sentiment, ANZ analysts said in a note on Tuesday.

Moderating recent threats from Iranian officials about shutting a vital oil shipping lane, a military commander was quoted on Monday as saying Iran would not close the Strait of Hormuz as long as it was able to use the lane itself.

Also on the supply front, U.S. crude oil stockpiles are forecast to have remained unchanged over the last week as a drop in imports was offset by lower refinery run rates, a preliminary Reuters poll showed on Monday.

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