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02-29-2012, 03:28 PM #1
Oil slips below $124 on demand concerns
Oil prices slipped below $124 a barrel on Tuesday as investors worried about high prices hurting demand, but ongoing supply concerns and the expectation of further liquidity injections from the ECB helped underpin prices at elevated levels.
Front-month Brent was down 69 cents to $123.48 a barrel by 0925 GMT, after settling more than $1 lower on Monday. U.S. crude was down 10 cents at $108.46 a barrel.
Analysts and traders said that the rise in oil prices to near 10-month highs last week had led to worries about the impact on the struggling economies of Europe, especially as the euro remains weak against the dollar.
"There is some concern growing that high oil prices may impact the economy and oil demand in future," said Carsten Fritsch, an analyst at Commerzbank in Frankfurt. "That is leading to profit-taking, which is not surprising given the huge build in speculative net long positions in recent weeks." He pointed to data from the CFTC showing that net long positions in U.S. crude futures had reached the highest levels since May 2011.
"Whilst the oil price acceleration has been a direct result of Iran tensions, a slowdown in rising tensions is a reason to take profits and assess," said Ben Taylor, a sales trader at CMC Markets. "Talk of demand destruction is also weighing on oil at these levels."
The surge in prices - an increase of more than 14 percent for Brent crude futures since the start of the year - has prompted the International Monetary Fund to flag oil as a rising threat to the global economy.
Brent will average $110.30 a barrel this year, according to a Reuters monthly oil poll, up from January's estimate of $107.30 due to fears of a loss of Iranian supplies.
Apart from Iran, oil markets are already coping with a disruption in shipments from smaller producers such as South Sudan and Syria.
More than 1 million barrels per day (bpd) of supply is estimated to be offline - 1.1 percent of daily world demand - including Libyan output yet to return after the virtual shutdown of its oil sector during its 2011 civil war.
"There are more upside risks than downside risks to oil prices because of supply concerns," said Victor Shum, senior partner at oil consultancy Purvin & Gertz.
Investors are worried that higher oil prices will hammer demand in the euro zone as it struggles to emerge from the sovereign debt crisis.
On Monday, ratings agency Standard & Poor's cut Greece's long-term ratings to 'selective default' in a widely expected move. The European Central Bank (ECB) has also temporarily suspended the eligibility of Greek bonds for use as collateral in its funding operations.
The market is now looking to a second tranche of liquidity from the ECB on Wednesday as part of its Long-Term Refinancing Operation.
Analysts and traders said the extra liquidity from the LTRO was helping to keep oil markets buoyant. "I don't see a sharp correction given the supply side risks and the huge amount of liquidity in the market," said Commerzbank's Fritsch.
The market is estimating that about 500 billion euros will be injected into the market by the ECB, but Fritsch said some estimates ranged up to 1 trillion euros. "If some of that money flows into commodity markets that will push up prices" he said.