Brent crude edged down today on nagging concerns about a euro zone debt crisis contagion, but prices held above $107 due to threats to supply emerging from France's call for sanctions on Iran's oil exports.
A slip by a French government official, mistakenly suggesting Paris was about to unilaterally ban Iranian oil imports, has raised expectations that EU countries could consider a boycott of Iran's oil sales to step up the pressure on Tehran over its nuclear programme.
But any gain in oil prices from Iran supply fears was curbed by the euro zone's persistent debt problems that are pushing policymakers to consider issuing a common bond underwritten by all members of the currency region - a move Germany opposes.
"The European situation is still uncertain," said Tetsu Emori, a commodities fund manager at Astmax Investments in Tokyo. "The crisis is still ongoing and what happened in Germany has made investors quite nervous."
A weak debt sale in Berlin this week fanned fears the debt crisis was starting to threaten Europe's biggest economy.
Brent crude oil futures fell 42 cents to $107.36 a barrel by 7.29am after earlier hitting a low of $107.30. The contract is expected to close little changed this week, after declining more than 6 per cent last week.
US crude is set for a second week of decline. The January contract fell 3 cents to $96.14 a barrel.
The euro fell today to a fresh seven-week low against the US dollar, carrying over weakness triggered by the comments of German chancellor Angela Merkel, who said yesterday she still does not think common euro zone bonds are necessary.
Oil is priced in dollars and it tends to weaken when the greenback strengthens and becomes less affordable for holders of other currencies.
Turmoil in the Middle East, and winter demand, gave oil more resilience than other commodities.
France's call for sanctions on Iranian oil exports, and any potential military action, may cut supply from Opec's second largest producer and disrupt oil trade at the Strait of Hormuz, the world's most important oil transit channel.
"Escalation of rhetoric towards Iran's nuclear programme has supported oil prices in recent weeks, competing with the gloomy economic headlines as the main driver of oil prices," Gordon Kwan, head of oil research at Mirae Assets Securities in Hong Kong said in a research note.
While France's push for a European oil embargo on Iran could raise the geopolitical premium on oil prices in the coming months, the proposal could face resistance from other EU members Italy and Spain, the two largest buyers of Iranian crude in the
region, Mr Kwan said.
Other Western governments are concerned that such moves could hurt the world economy as well as Tehran.
High oil price could "strangle" efforts to get the global economy back on its feet and may also hamper Asia's ability to help the West exit its crisis, the International Energy Agency's chief economist said yesterday.
Plans to reverse the Seaway pipeline in the United States that will reduce a glut at delivery point Cushing, Oklahoma, have pushed WTI prices higher while a ramp-up of output at Libya has capped gains in Brent.
Reuters
