Brent crude fell on Tuesday, dragged down by the sell off in the spread to US crude and a warning about risks to Spain's economy that added to concerns about the euro zone.
A sell off in the spread between Brent crude and US oil futures narrowed the London grade's premium to below USD 17 a barrel for the first time since June 9 as West Texas Intermediate staged a late session rally to end higher.
Crude prices had turned negative just before noon in New York trading. The move picked up momentum after the International Monetary Fund warned that Spain faces considerable risks to economic recovery and must deepen and conclude reform work to allay market concerns.
"Crude futures fell back on the news of the IMF warning that the repair of Spain's economy is incomplete and that risks are still considerable," said Phil Flynn, analyst for PFGBest Research in Chicago.
"People are also concerned that the confidence vote on the Greek government later today won't go as smoothly as earlier thought."
Prices had risen in early trade, with gains pegged to the weakening in the dollar as investors grew more optimistic that Prime Minister George Papandreou's cabinet would survive a confidence vote.
Brent August crude tumbled 74 cents to USD 110.95 a barrel, off earlier highs of USD 113.10 a barrel and marking the lowest settlement since May 23.
US crude for July delivery, which expired on Tuesday, rose 14 cents to settle at USD 93.40. The more heavily traded August contract rose 54 cents to settle at USD 94.17 a barrel, before turning negative after the release of US inventory data from the American Petroleum Institute.
"The market is obviously nervous and is trying to sort out macro economic issues like the confidence vote in Greece. Asset classes, across the board, are trying to sort their next direction," said John Kilduff, partner at Again Capital LLC.
Brent crude reversed after failing to match Monday's intra-day high and hitting resistance at the 50% Fibonacci retracement point of the price gains achieved between May and June.
U.S. trading volumes were light, about 32% below the 30-day average just after the settlement at 493,000 lots. Brent traded a similar volume -- 484,000 lots -- about average for the 30-day period.
Analysts said that while crude oil prices remain high, the specter of weak demand and economic concerns have raised concerns among traders, with Brent crude falling for three straight sessions.
"This is one of those markets where there is not a lot supporting it," said Peter Beutel, president of Cameron Hanover, trading consultants in New Canaan, Connecticut.
"At any given moment it can start dropping because there is no fundamental support, the demand numbers are not strong -- these are the kinds of numbers you seen in a recession, not an expansion."
Inventory data weighs
US crude for August turned negative in late, post-settlement trade, dropping 10 cents to USD 93.52 a barrel, following a smaller-than-expected draw in crude oil stocks in the last week, according to the API data.
Crude oil stocks fell by a small 81,000 barrels last week as refinery utilization rose, compared with analysts' expectations of a 1.4 million barrel decline.
Inventories at the key US futures delivery hub of Cushing, Oklahoma rose by 857,000 barrels on the week, API said.
Oil product stocks unexpectedly fell, with gasoline inventories off 1.5 million barrels even as refinery utilization rates climbed 2 percentage points to 86.5% of capacity.
