Oil declined for a third day in New York as Europe’s struggle to save the euro countered concern that tension with Iran may disrupt Middle East crude exports. Morgan Stanley said the outlook for crude is “grim.� Futures fell as much as 0.7 percent before German and French leaders meet in Berlin today seeking to craft a plan for rescuing the euro over the next three months. The U.S. will act to reopen the Strait of Hormuz if Iran blocks the channel, Joint Chiefs of Staff chairman General Martin Dempsey said in an interview on the CBS “Face the Nation� program yesterday. Oil fundamentals bearish are likely to weaken in the months ahead, according to the Morgan Stanley report. “It’s a matter of two factors for the market,� said Ric Spooner, a chief analyst at CMC Markets in Sydney. “We have concerns about potentially significantly reduced economic activity emanating from Europe, and Iran. Any potential disruptions have to be taken seriously because it won’t take much to put us into a supply problem.� Crude for February delivery slipped as much as 66 cents to $100.90 a barrel in electronic trading on the New York Mercantile Exchange. It was at $101.10 at 3:27 p.m. Sydney time. The contract fell 0.3 percent to $101.56 on Jan. 6, the lowest close since Dec. 30. Prices are 2 percent higher this year. Brent oil for February settlement was at $113.11 a barrel, up 5 cents, on the London-based ICE Futures Europe exchange. The European benchmark contract’s premium to New York crude was at $12.04, the highest gap based on closing prices since Nov. 15. The difference rose to a record $27.88 on Oct. 14 as the uprising in Libya curbed supplies of light, sweet crude. Berlin Meeting “Oil prices have been volatile, caught between a weakening Europe and tensions around a key supply route,� Sharon Zollner, senior economist at Australia & New Zealand Banking Group Ltd. in Wellington, said in a note today. German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet in Berlin to flesh out a new rulebook for fiscal discipline negotiated at a Dec. 9 summit. Spain, Italy, the Netherlands, Austria and Germany plan to sell bonds this week, offering a gauge of market confidence. Spanish 10- year yields rose by the most in almost 17 years last week. Factory orders in Germany, Europe’s largest economy, dropped the most in almost three years in November. Orders (GRIORTMM), adjusted for seasonal swings and inflation, slipped 4.8 percent from October, the Economy Ministry in Berlin said Jan. 6. That’s the biggest drop since January 2009. Bearish Fundamentals “Geopolitical risks will continue to dictate price action, but fundamentals remain bearish,� Hussein Allidina, Morgan Stanley’s head of commodities research in New York, wrote in a report dated yesterday “The deterioration in fundamentals should accelerate as we move into seasonally weaker demand in the months ahead, with higher prices likely to exacerbate the expected weaker� trends in the first half, the report says. Investors are concerned about Europe’s ability to execute plans to prop up the euro, Allidina said. “The potential for policy errors and negative headlines is likely greater in 2012 than in 2011.� Iran has the ability to block the Strait of Hormuz, a transit route for a fifth of the world’s oil, “for a period of time,� according to Dempsey. The U.S. tightened economic sanctions against the Persian Gulf nation over its nuclear program on Dec. 31 and the European Union is weighing a ban later this month on purchases of Iranian crude. Pipeline Delayed A pipeline that would allow oil from the United Arab Emirates to bypass the Strait of Hormuz separating it from Iran has been delayed because of construction difficulties, two people with knowledge of the matter said yesterday. The 1.5 million barrels-a-day link would ensure the U.A.E. can export crude without risking a blockade at the channel. The $3.3 billion project won’t be ready until at least April, one of the people said. Abu Dhabi, holder of most of the U.A.E.’s oil reserves, had planned to start exports in January 2011 through the pipeline to a port outside the strait, Dieter Blauberg, the project’s former director, said in May 2009. Hedge funds increased bullish positions 4.1 percent in the week ended Jan. 3, according to the Commodity Futures Trading Commission’s Commitments of Traders report. Open interest advanced 3.5 percent, rising for a second week after falling in December to the lowest since May 2007, according to the CFTC. To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net To contact the editor responsible for this story: Alexander Kwiatkowski in Singapore at akwiatkowsk2@bloomberg.net

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