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  • July 6th, 2011

Oil Slips Near $96 on Europe Debt Woes, China Rate Rise

Oil prices fell on Wednesday as China raised interest rates and Moody’s cut Portugal’s credit rating to “junk” status, fuelling fears about the sustainability of global economic recovery.

In London, Brent crude last fell $1.02 to trade near $112.59 a barrel after touching a session low of $111.91. The benchmark rose more than $2 on Tuesday, its first gain in three sessions.

U.S. light, sweet crude was last down 44 cents at about $96.46 a barrel.

China’s central bank increased interest rates for the third time this year on Wednesday, stoking fears that growth in the key energy consumer may slow more rapidly.

“I think the market accepts that China is making a concerted attempt to rein in inflationary forces through use of interest rates, so it’s short term bearish for commodity usage but medium term, it’s supportive if controlled growth is managed,” Mark Thomas, head of energy Europe at broker Marex said.

Others were also upbeat about longer-term prospects in China.

“Absolute demand in China is going to continue growing. Gas oil demand is still going to go up at a steady pace,” said Priya Balchandani, an oil analyst at Standard Chartered Bank in Singapore said.

Earlier, Moody’s became the first ratings agency to cut Portugal’s credit standing to junk, warning the country may need a second round of rescue funds before it can return to capital markets.

This ended a seven day winning streak for European equities and sent commodities lower after they had been stronger in Asian trading.

Moody’s also warned its credit outlook on Chinese banks may turn negative as China’s local government debt may be understated by as much 3.5 trillion yuan ($540 billion).

Caution on the outlook for China was also heightened after Singapore’s Temasek, a sovereign wealth fund, sold part of its stake in two of the so-called “Big Four” Chinese banks.

Industry group American Petroleum Institute will release its weekly report at 2030 GMT, while the U.S. Energy Information Administration will issue its own data on Thursday.

Crude oil inventories in top consumer United States are expected to have dropped last week for a fifth straight time, according to a Reuters poll. EIA/S

Barclays Bullish

However, a bullish longer-term view from banks on oil prices helped prevent sharper losses.

Barclays Capital raised its 2012 forecast for Brent on Tuesday by $10 to $115 per barrel, and upgraded its 2012 forecast for U.S. crude by $4 to $110.

The bank left its Brent forecast for 2011 at $112 but cut its U.S. crude 2011 forecast by $6 to $100.

Barclays technical analyst Lynnden Branigan said Brent crude was likely to be rangebound for the summer months, and that there was significant support at Tuesday’s low at $110.45.

Market participants said prices were also dented by a 60 million barrel release of emergency stocks by the International Energy Agency, though there was still uncertainty as to how the oil would be released and the extent of its overall impact.

Top exporter Saudi Arabia earlier said it would pump enough oil to meet global supply after an OPEC meeting failed to reach agreement on increasing quotas.

However, traders said Asian refiners may skip taking extra volumes of crude being offered by Saudi Arabia as it failed to cut prices deeply enough to lure buyers.

The Saudis have effectively signalled that they believe the market is well supplied at current prices and they see no need to offer bigger discounts, said Clyde Russell, a Reuters market analyst.

An oversubscribed sale of U.S. crude reserves last week also had oil analysts and investors assessing whether it reflected tighter global oil supplies than recent assessments.

In the Middle East, violence and unrest in Yemen and Iraq continues to provide a supportive geopolitical premium as a factor lifting oil prices, analysts said.


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