Oil dips below $106 as stimulus hopes fade

on July 31 2012 10:59 AM

Oil slipped below $106 a barrel on Tuesday as concerns that new central bank stimulus measures would fail to revive fragile economies outweighed China's pledge to keep its economy growing.

Brent crude was off 31 cents to $105.91 per barrel by 9:45 a.m. EDT (1345 GMT), having dropped to a low of $105.27 in earlier trade. U.S. crude was down 26 cents at $89.52, after hitting a low of $89.34.

Oil had risen earlier after a pledge by leaders in China, the world's biggest energy consumer, to increase fiscal and monetary support to the economy in the second half of the year.

Dealing was light, with market players holding back ahead of central bank meetings this week.

"This may also be the calm before the storm," said a research note from JBC Energy.

Brent has risen 8 percent in July, the biggest monthly gain since February, while U.S. crude has added more than 5 percent so far this month, snapping a two-month losing streak.

Oil received some support from continued worries about supply. Production from OPEC fell by 450,000 barrels per day (bpd) in July to 31.18 million bpd, a Reuters survey showed. Investors are now eyeing data on stockpiles in top oil consumer the United States.

And U.S. crude stockpiles are expected to have fallen by 1.6 million barrels last week due to lower imports, a Reuters poll of analysts showed ahead of weekly inventory data from the American Petroleum Institute later on Tuesday.

But sluggish growth in the U.S. and continued uncertainty over how quickly European leaders can revive their economy weighed on the minds of investors.

"For the moment, the economy remains the main focus for most investors; that isn't to say that the situation in Iran and the Middle East isn't of concern," said Ric Spooner, chief market analyst at CMC Markets.

Slowing growth in the United States, the world's top oil consumer, has triggered expectations of stimulus measures from the Federal Reserve, which meets later on Tuesday and on Wednesday.

President Barack Obama warned on Monday the U.S. economy would face continuing "headwinds" over the next few months, with Europe's debt crisis still posing a challenge, but predicted the euro zone and its currency would remain intact.

A promise last week by European Central Bank President Mario Draghi to do what it takes to protect the euro raised expectations of new policy measures to solve the debt crisis when the ECB meets on Thursday.

Europe's central bank meeting is in sharp focus, given the threat the long-running euro zone crisis poses to the global economy.

Inflation in the region remained steady for the third straight month in July, offering little comfort to consumers at a time when the number of people out of work continues to climb.

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