(Reuters) - Oil fell sharply on Tuesday on fears that politicians will be powerless to stop the debt crisis in Europe from spreading to Italy and Spain, reinforcing fears about the outlook for the global economy.
Ministers from the 17 countries that share the euro vowed on Monday to safeguard stability and promised new measures shortly, but set no deadline after another day of turmoil across financial markets.
Brent crude fell $1.95 to $115.29 a barrel by 1105 GMT, while U.S. crude for August slid $1.10 to $94.05. Both contracts fell more than $1 on Monday as well. U.S. crude was heading for its lowest close in two weeks.
"The euro has come off against the dollar and (the European debt worries) seem to be pushing down all risky assets, and that's influenced prices of oil," said Harry Tchilingurian, head of commodity market strategy at BNP Paribas.
The euro slumped to an all-time low against the Swiss franc and fell to a four-month trough against the dollar. The dollar's strength makes oil priced in other currencies relatively expensive.
Disappointing U.S. employment data and falling crude imports in China also soured the mood in the oil market over the past two trading sessions.
This has dented Brent's rally from about $102, a low reached after the June 23 announcement by the International Energy Agency (IEA) of a coordinated emergency stockpile release.
But Brent is still above its level before the IEA said it would release 60 million barrels from emergency reserves of oil.
The IEA on Monday said the amount of oil made available from emergency stocks would be slightly less than earlier stated after sales by member countries met with mixed demand.
There is technical support near current levels for Brent that should protect to some extent against further weakness, said Rob Montefusco, a trader at Sucden Financial.
"There's a mini head-and-shoulders formation under $115, so we could see a slight dip, but there is a big band of support around $114, the $114.05 34 day moving average should support," Montefusco said.
IEA LIMITATIONS
Even after today's slip, Brent crude's strength shows the limitations of the IEA's power to affect supply, analysts said.
"The recent Brent strength suggests that the IEA release has so far been an unsuccessful attempt to alleviate the ongoing pressures in the oil market," Bank of America Merrill Lynch said in a note.
"This is mostly because the IEA release in Europe has consisted of petroleum products, particularly distillates, not crude oil," the note said, adding that crude stocks were already held by the industry in most cases.
Oil available under the plan will amount to 59.
Output from the world's largest oil exporter, Saudi Arabia, hit a high for the year so far of around 9.5-9.6 million barrels per day (bpd) in June, up nearly 800,000 bpd from May, industry sources said on Monday.
U.S. crude oil inventories probably fell by 2 million barrels in their sixth straight weekly drop, a Reuters poll showed before an industry report later on Tuesday and government figures due Wednesday.
Gasoline stockpiles were projected to have risen by 400,000 barrels, while distillate stockpile including heating oil and diesel were expected to have risen by 600,000 barrels.
Crude imports by China will recover in July from a downward blip as refiners crank up production to meet rising demand after a heavy maintenance program led to the first decline in six months in June.
But demand growth at the world's second-largest oil consumer is expected to slow this year from last as higher interest rates pare consumption.
(Additional reporting by Alejandro Barbajosa in Singapore, editing by Jane Baird)
