New York - Crude oil prices fell on Monday amid growing fears of a sovereign debt default on either side of the Atlantic and on the possibility of another emergency stock release from the International Energy Agency (IEA).
Policymakers in Europe and the United States have offered no clear solutions to their respective debt problems, forcing investors into perceived 'safe havens' like gold, which rallied to a record high above $1 600 an ounce.
"People are cautious about what's happening, especially in Europe where some see the debt crisis worsening," said Joachim Azria, analyst at Credit Suisse in New York.
"The oil market has been volatile over the past month and with the focus on the debt problems in Europe traders are moving into 'wait and see' mode during the summer lull."
By 11:10 EDT (1510 GMT), Brent crude futures were down $1.55 at $115.71 a barrel, having earlier touched a low of $114.66. US crude, meanwhile, extended losses following a weaker open on Wall Street, losing $2.04 to $95.20 a barrel.
French government spokeswoman Valerie Pecresse said she believed the euro zone's 17 national leaders meeting on Thursday at a summit in Brussels would agree on a rescue of Greece, supplementing a €110bn ($154bn) bailout launched in May last year.
But after three weeks of preparatory talks, it was unclear whether a consensus could be reached on a way for private owners of Greek government bonds - banks, insurers and other investors - to contribute to the bailout by taking cuts in the face value of their holdings.
In the United States, Republican and Democratic senators sought on Sunday to craft a plan that could avert an unprecedented default by the top oil consumer while making modest cuts in the deficit.
But while there were few signs of concrete progress as the August 2 deadline to avoid default draws dangerously close, most analysts still say they expect a deal to be struck in time.
"The lingering debt ceiling crisis in the US is not as serious (as in Europe), as in a worst case scenario politicians will make only marginal cuts and run for cover, thus providing themselves with 'the out' they need in order to raise the debt ceiling," analysts at MF Global said in a note to clients.
Emergency stock release II?
The International Energy Agency (IEA), the West's oil watchdog, is expected to confer with its member countries by July 23 to decide whether to draw further on emergency oil stocks, a move that requires the backing of all 28 members.
Last month, member countries agreed to release 60 million barrels, only the third such move in the IEA's history, in a bid to calm the near 20% in Brent prices since the start of the civil war in Libya.
The IEA stock release drove Brent down to $102.28 on June 27, but now prices are at a similar level to where the front-month contract was trading when the Organization of the Petroleum Exporting Countries (Opec) failed to agree on a collective output increase on June 8.
"Another release might not be imminent but they could decide on another release by the beginning of September," said Azria at Credit Suisse.
"The full take up of the 30 million barrels offered in the United States could provide the incentive for a further release."