Brent hovers around $96, near 16-month low as Europe weighs

Wednesday, 20 June 2012 00:10 -     - {{hitsCtrl.values.hits}}

Reuters: Brent crude steadied around $96 a barrel on Tuesday, staying close to 16-month lows hit in the prior session, as Spain’s rising borrowing cost showed Europe is nowhere near resolving its debt crisis that has hurt the outlook for fuel demand.

Oil, along with other commodities, fell on Monday after an initial rally fueled by the victory of pro-bailout parties in Greece lost steam, as Spain’s surging bond yields raised concern the country may need a full-blown bailout.

“The Greek election result gave the market a brief respite, that was it, now investors are clearly focused on Spanish government bond yields,” said Michael Creed, an economist at National Australia Bank.

Brent crude, which is down around 25 percent since hitting a peak above $128 in early March, was up 8 cents at $96.13 per barrel by 0404 GMT.

It hit a session low of $95.80, not far from Monday’s low of $95.38 - its weakest since January 2011.

U.S. July crude, which expires on Wednesday, slipped 7 cents to $83.20 per barrel.

Uncertainty in the market, with Spain’s borrowing costs taking centrestage now, will likely keep volatility high.

Yield on Spanish 10-year bonds hit a fresh high above the unsustainable 7 percent mark on Monday. Greece, Ireland and Portugal were forced to seek international bailouts soon after their 10-year bond yields rose above 7 percent.

“More expensive Spanish debt costs potentially bring forward the time when the government will need to seek help and draw down firewall buffers to meet ongoing commitments,” Ric Spooner, chief market analyst with CMC Markets, said in a note to clients.

Investors are now looking for fresh trading cues from the U.S. Federal Reserve’s policy meeting and the China flash manufacturing PMI from HSBC this week.

The U.S. central bank’s two-day policy meeting, which kicks off later in the day, will be watched closely for any indication that the Fed will roll out another round of monetary easing to combat a slowing recovery.

That would be good news for commodities, such as oil, as it boosts market liquidity in the short term, and also builds fuel demand as the stimulus works its way into the economy.

Six world powers and Iran resume talks in Moscow on Tuesday after making little headway on their first day of talks on Monday on how to end a decade-long dispute over Tehran’s nuclear program which risks sparking a new Middle East war.

But analysts say investors are more worried about the shaky global economy, led by Europe, than market fundamentals, including potential supply disruptions.

“The macroeconomic picture is dominating markets at the moment, certainly Iran and the threat of supply disruptions has moved to the back burner for now,” Creed said.

“Sanctions were never going to make any real impact on markets. The main concern is if they decided to shut the Strait of Hormuz, that threat seems less likely now.”