Brent crude inched towards its lowest so far this year on Tuesday, slipping below $97 on concerns the euro zone debt crisis will worsen and hurt the global economy, threatening growth in oil demand.
Optimism over a bailout for Spain's troubled banks faded on concerns about the impact the package will have on public debt, while uncertainty surrounding elections in Greece compounded worries the financial crisis in Europe will deepen. Most assets, from Asian shares to the euro, reversed previous day's gains.
Brent slipped as low as $96.62 a barrel, close to the low for the year of $95.63, struck on June 4. It was trading 79 cents lower at $97.21 by 0311 GMT. U.S. oil was down 90 cents at $81.80 a barrel after dropping to a low for the year at $81.07. Both contracts have fallen for the fourth day.
"We will see this kind of volatility because of the uncertainty over Greek elections, lack of clarity on the length and breath of the Spanish bank bailout," said Ben Le Brun, a Sydney-based markets analyst at OptionsXpress. "I am not surprised to see the pull back in oil prices."
A key support for the U.S. contract is $80 a barrel and $95 for the European benchmark, Le Brun said. A slide in prices to those levels will trigger technical buying, he said.
Brent will revisit the June 4 low of $95.63, while U.S. oil is expected to consolidate in a range of $81.21-$82 for half or one trading session before dropping towards $78, according to Reuters technical analyst Wang Tao.
Crude futures had rallied more than $2 on Monday on the news that euro zone finance ministers agreed to lend Spain up to $125 billion to tackle the problems of debt-stricken banks. But doubts about the deal emerged overnight, rekindling concerns that Madrid's financial woes would worsen.
Cyprus strongly hinted on Monday it may before the end of this month become the fifth member of the currency bloc to apply for an international bailout to help its banks, which are heavily exposed to Greece.
Reflecting heightened fears of the European crisis worsening, officials in the region have discussed limiting the size of withdrawals from ATM machines, imposing border checks and capital controls as they prepare for a worst-case scenario of Athens leaving the group.
OPEC OUTPUT TARGET
Oil is also under pressure following comments from top oil exporter Saudi Arabia calling for an increase in OPEC's output target for the second half of the year despite a recent fall in crude prices.
"Our analysis suggests that we will need a higher ceiling than currently exists," Saudi Oil Minister Ali al-Naimi said in an interview with the Gulf Oil Review ahead of a meeting of the Organization of the Petroleum Exporting Countries on Thursday.
Comments by Naimi were at odds with the assessment by Iraq's OPEC President, Abdul Kareem Luaibi, that there is a surplus in supplies from the 12-member group.
OPEC meets on Thursday in Vienna to chart production policy. Supply from the 12-member group, running nearly 2 million barrels per day above a self-imposed production ceiling of 30 million bpd, is at its highest since 2008.
OPEC's biggest producer, Saudi has lifted output sharply to 10 million barrels a day, a 30-year high, to prevent inflated fuel prices blocking global growth. That has partly helped Brent fall from the high of $128 a barrel for the year touched in March to below $100 a barrel.
"It is interesting to see the timing for making that sort of a comment," Le Brun said. "Any addition to the supply side is going to have a softening impact on prices at this point."
Industry data due later today from top consumer the United States will help provide further direction to prices.
U.S. crude supplies were forecast to have fallen last week for the second straight time, due to lower imports, a preliminary Reuters poll showed.