Crude Oil Falls on Euro Zone Worries, Dollar

Brent crude oil fell more than $1 to below $108 per barrel on Tuesday, on worries over the health of Europe's economy as its top financial watchdog said the euro zone's sovereign debt crisis threatened global economic stability.

European Central Bank President Jean-Claude Trichet issued the dramatic warning amid growing fears that Greece would default on its massive sovereign debt .

European shares fell and the dollar rose on Tuesday, with investors increasingly edgy ahead of a vote by Slovakia's parliament to ratify an expansion of the euro zone's rescue fund.

Brent futures for November delivery [LCOCV1  110.22    1.27  (+1.17%)   ] fell $1.50 to a low of $107.45 before recovering to trade around $109.33.

U.S. November crude oil futures [CLCV1  85.15    -0.26  (-0.3%)   ] dipped to a low of $83.97, down $1.44 before climbing back up to around $85.19. Both contracts jumped nearly 3 percent on Monday.

Financial markets are deeply skeptical over the chances of success of a financial package to be put together by France and Germany to stem the euro zone debt crisis, help Greece and recapitalize European banks.

"The last few days have seen a relief rally on hopes that policymakers would do something radical to sort out the euro zone debt mess," said Standard Bank oil analyst James Zhang. "But optimism is fading and there is a feeling that the problem may not be properly addressed and profit-taking has kicked in."

Investors remain cautious due to the lack of detail about the Franco-German plan and worry it could be derailed by political deadlock in Slovakia, the one euro country that has yet to approve the European Financial Stability Facility (EFSF) expansion.

The global economic outlook is sending increasingly gloomy messages to the oil market, encouraging economists to trim their expectations for future oil use.

OPEC Cuts Demand Growth Forecast

The Organization of the Petroleum Exporting Countries (OPEC), which pumps a third of the world's oil, cut its global oil demand growth forecast for a fourth consecutive month on Tuesday, citing the downturn in developed countries and efforts by China and India to curb fuel use.

"The economic downturn is taking its toll on the world oil demand," OPEC said in its monthly oil market report. "The decelerating U.S. economy, high unemployment rate and feelings of uncertainty among consumers, has damped U.S. oil demand. Similarly, debt problems in the euro zone are causing EU economies to lose some of their estimated growth this year."

OPEC cut its forecast of global oil demand growth this year by 180,000 barrels per day to just 880,000 barrels per day. Next year it sees oil demand growing slightly faster — by 1.19 million barrels per day, down 70,000 barrels per day from its previous estimate in September.

Traders were closely watching oil exports from Kuwait, one of OPEC's top five producers, after a strike by customs workers shut ports and halted vessel traffic on Monday.

A spokesman for the country's oil sector said on Tuesday exports of crude and oil products were moving normally from Kuwaiti ports, but it was not clear whether there would be any further disruption of cargo movements.

Kuwait accounted for about 7.7 percent of OPEC's overall crude output in 2010, Reuters data showed.

Investors were also keeping an eye on oil inventories in the U.S. for demand cues in the world's largest consumer. U.S. commercial crude stockpiles probably rose last week as imports rebounded and refinery runs fell, a preliminary Reuters poll of analysts found on Monday.

Refinery capacity utilization was forecast to have slipped for a third week, with analysts expecting runs to have fallen by 0.85 percentage point last week.

The decline is expected to come as some plants take units offline for maintenance between the end of the summer driving season and the rise in winter demand for heating oil.

cnbc.com