Wednesday, May 23, 2012

--Euro hits lowest level vs. dollar since August 2010

--Potential breakthrough in Iran nuclear standoff

--U.S. data expected to show further gain in 22-year-high crude stocks 


   By David Bird 
   Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Crude oil futures were weaker Wednesday as fresh worries that Greece may exit the euro raised concerns over the health of European economies.

After Lucas Papademos, fromer Greek prime minister, said plans for exit from the common currency agreement are being considered, the euro sunk to its lowest level against the dollar since August 2010.

"Oil demand will also become suspect as fears of contagion may have a deflationary impact on price," said Phil Flynn, and analyst at PFG Best, explaining the impact of a Greek exit from the euro. "Worries about the strength of European banks then would freeze lending perhaps, and energy demand would dry up."

Strength in the dollar and the worries about a potential contagion effect of economic instability through the euro zone nations stung oil futures as the market already is witnessing steady shrinkage in the "war premium" that has grown over the past several months amid in impasse with Iran and the world's major powers over Tehran's nuclear program.

United Nations nuclear officials said a tentative deal has been reached with Iran to open controversial sites for inspection as major internationals talks on the issue were about to get underway in Baghdad. The potential breakthrough comes as a July 1 European Union embargo on imports of Iranian crude looms and Saudi Arabia and others in the Organization of Petroleum Exporting Countries have boosted output sharply to cover potential lost oil supplies from Iran.

Past threats from Iran to block the key Strait of Hormuz, the export route for critical Gulf oil supplies, has inflated prices by $15-$20 over the past several months. OPEC's explicit efforts to pull prices down to around $100 by raising supply has contributed to an agressive selloff.

Light, sweet crude oil for July delivery on the New York Mercantile Exchange was down 59 cents at $91.28 a barrel, after trading in a range of $90.71 to $91.72. Prices last week settled at their lowest levels since October, down from February levels near $110 a barrel.

"Looks like the war, nuclear, terror premium has vanished," said Tony Rosado, a broker at GA Global Markets. "We were at $92 when the rally started" back in mid-December, he said.

ICE July North Sea Brent crude was down $1.31 at $107.11 a barrel. Brent hit highs about $126 at the height of the Iran worries in recent months.

Traders are also keeping a close eye on weekly U.S. oil inventory data set for release at 10:30 a.m. EDT by the Energy Information Administration.

Analysts surveyed by Dow Jones Newswires said the data are expected to show crude oil inventories, already at their highest level since 1990, rose by 500,000 barrels in the week ended May 18.

The American Petroleum Institute, a trade group said late Tuesday afternoon, its figures showed a 1.5-million barrel rise in crude stocks.

API also said gasoline stocks fell by 4.5 million barrels, well beyond the 700,000-barrel decline expected by analysts. Distillate stocks (diesel/heating oil) fell 235,000 barrels, the API said, about in line with analysts' expectations of a 200,000-barrel drop.

Reformulated gasoline blendstock futures for June delivery were 1.20 cents lower, at $2.925 a gallon. June heating oil traded 2.22 cents lower, at $2.8394 a gallon.

-By David Bird, Dow Jones Newswires; 212-416-2141; david.bird@dowjones.com

(END) Dow Jones Newswires

May 23, 2012 10:02 ET (14:02 GMT)