Investor caution keeps Brent above $118

2012-04-19 09:04

Singapore - Brent crude futures held above $118 on Thursday as investors remained cautious ahead of a key Spanish bond auction, with renewed fears of a eurozone debt crisis keeping a lid on oil demand.

A higher-than-expected increase in crude oil stocks, which rose for a fourth straight week in the United States, also weighed on prices.

Brent June crude gained 38 cents to $118.35 a barrel at 06:30 GMT, after hitting $116.70 in the previous session, its lowest in more than two months.

US May crude slipped 5c to $102.62, after falling more than a dollar in the previous session. The May contract expires on Friday.

“Everyone’s waiting for the Federal Open Market Committee (FOMC) meeting next week on monetary policy, and the Spain auction later today, with the outcome potentially having an impact on the oil market,” said Ken Hasegawa, a commodity derivatives manager at Newedge Brokerage in Tokyo.

“Fundamentally, there’s also a lot of inventory on crude that’s weighing on the market, but the Iran talks are providing support for the oil market.”

The support levels for Brent and US crude are at $116 and $100 a barrel respectively, with no big sharp upside expected in the market, Hasegawa said.

A more challenging longer-term debt sale looms on Thursday, when Spain, the eurozone’s fourth-largest economy, will sell two- and 10-year bonds, even as an auction of 12- and 18-month Spanish debt earlier this week was considered a success.

Investors see the sales as a test of demand for the country’s debt.

“There is potentially a good upside if yields are low. However, if Spain’s cost of debt breaches the 6% barrier, expect a sell-off in equities and commodity instruments and a shift to the safe haven of US and German treasuries to emerge,” Miguel Audencial of CMC Markets wrote in a note on Thursday.

Spanish banks’ bad loans rose to their highest since October 1994 in February to stand at 8.2% of their credit portfolios, Bank of Spain data showed on Wednesday, as the sector continues to battle sliding house prices and a looming recession.

To help cushion the impact of a potential European debt crisis, the International Monetary Fund (IMF) said on Wednesday it had raised $320bn so far, with Poland and Switzerland joining the effort.

The IMF is hoping to secure at least $400bn in commitments from finance officials around the globe.

All eyes are also on next week’s meeting of the policy-setting FOMC, which will be closely scrutinised for any hints of a third round of quantitative easing which could have an impact on oil prices.

US stocks

US crude stocks jumped 3.86 million barrels to nearly 22.8 million in the week to April 13, the biggest four-week build since February 2009, data from the US Energy Information Administration (EIA) showed.

The increase exceeded analyst expectations for a rise of 1.4 million barrels.

The build helped offset supply concerns due to a string of disruptions across the globe this year, as well as worries about the potential loss of oil from Iran due to EU and US sanctions against the Opec producer set to take effect in July.

Appetite for other crude grades could also increase, with Japan slashing Iranian crude purchases by almost 80% in April versus the first two months of the year, as tightening sanctions make it tough to pay, ship and insure the oil.

Iran and six world powers have decided to reconvene on May 23 in Baghdad after talks on Iran’s disputed nuclear programme resumed last Saturday, following a long gap.

Iran has said it is ready to resolve issues raised by the West that spawned tension, driving a jump in oil prices last month to the year’s highs.