Oil prices stalled today as a weaker dollar and tension in Iran balanced against a broad market fall on Standard & Poor's possible euro zone downgrades if no convincing plan emerges to solve the debt crisis this week.
"The cost of not agreeing will be higher than agreeing. But for oil markets, if an agreement is reached there will be a lot of austerity measures and this will affect demand," said Thorbjoern Bak Jensen, analyst at A/S Global Risk Management Ltd.
Brent crude was up 24 cents at $110.05 a barrel by 11.30am, while US crude was up 1 cent at $101 a barrel.
The rating agency's move drew criticism from the European Central Bank, as one council member questioned whether the ratings agency was contributing to the European debt crisis, adding that S&P's methods had become increasingly political.
But worries about downgrades and the debt crisis were balanced by German industrial orders for October which posted their strongest rise since March 2010, helping to send the euro to a session high versus the dollar.
Markets were also supported by growing expectation of an interest rate cut this week by the ECB, after European statistics agency Eurostat confirmed estimates pointing to weakening growth.
Diplomats and oil industry sources told Reuters that the prospect of a ban on Iranian crude oil imports to Europe may be fading amid growing scepticism among members about the effectiveness of sanctions.
Countries are increasingly taking the view that sanctions are more likely to harm their own interests than cut into Iranian oil revenue.
But the world's fifth-largest oil exporter has said it cannot rule out a self-imposed oil embargo to punish the West and the ongoing threat of an interruption in supply has helped keep oil prices supported.
And analysts say the risk of a unilateral strike on Iran by Israel or an escalation of tensions between Tehran and its Arab neighbours remains.
"Iran is just politics, but if something happens, the impact will be high. So even if the overall probability of conflict is low, put together the risk is medium," Mr Jensen continued.
Market participants are also waiting for next week's OPEC meeting, where the group's members look set to agree on a new production target that legitimises current cartel output around 30 million barrels a day.
"Today's elevated oil price is likely to discourage OPEC from cutting, regardless of the rhetoric from Vienna on December 14th," said analysts at Morgan Stanley in a research note.
Worries about high oil prices were echoed by BP chief executive Bob Dudley, who said today that high oil prices could derail the fragile economic recovery.
Reuters
