Oil drop as traders fret over Italian debt

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Oil prices fell on Wednesday as Italy's borrowing costs soared to the the key 7.0-percent level and sparked fears that the eurozone crisis could undercut energy demand.

Losses were capped however by geopolitical concerns surrounding major crude producer Iran after the UN atomic watchdog released what it called "credible" intelligence suggesting that Tehran has worked on developing nuclear weapons.

New York's main contract, light sweet crude for delivery in December, slipped $1.37 to $95.43 a barrel.

Brent North Sea crude for December fell $1.08 to $113.92.

Italian government borrowing costs soared Wednesday with the yield on benchmark 10-year bonds topping 7.0 percent, stoking concern that Rome could follow Athens, Dublin and Lisbon in seeking an emergency EU-IMF bailout.

Traders dumped equities and rushed for safe-haven assets, like the dollar, after Italian Prime Minister Silvio Berlusconi announced late Tuesday that he would resign later this month following the adoption of key budget reforms.

A stronger dollar makes dollar-priced oil more expensive for buyers using rival currencies, dampening demand for crude.

"It's not looking good," VTB Capital analyst Andrey Kryuchenkov told AFP, adding that the Italian news added to the "negative macro sentiment" which surrounds the long-running eurozone sovereign debt crisis.

At the same time, Kryuchenkov said the downside for oil prices "will still remain limited due to heated debates over Iran" in the wake of the International Atomic Energy Agency's report on Tehran.

The Vienna-based IAEA said it had "serious concerns" based on "credible" information indicating that the Islamic republic "has carried out activities relevant to the development of a nuclear explosive device."

With Washington threatening to increase international pressure on Iran and Israel's president stoking speculation of a pre-emptive strike, the IAEA report was set to stoke tensions in the oil-rich Middle East.

Iran in turn vowed that it "will not budge an iota" from its nuclear path despite the new UN report hardening suspicions it is seeking atomic weapons.

Tehran maintains that its nuclear programme is exclusively civilian and peaceful in nature.

Elsewhere on Wednesday, the Paris-based International Energy Agency (IEA) predicted that global oil demand was set to grow 14 percent by 2035, helped by China and emerging economies, and prices could hit $120 per barrel.

"Growth, prosperity and rising population will inevitably push up energy needs over the coming decades," IEA executive director Maria van der Hoeven said.

"But we cannot continue to rely on insecure and environmentally unsustainable use of energy."

The agency estimated that global demand for oil would total 99 million barrels per day in 2035, or 12 mbpd more than in 2010.

© 2011 AFP

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