(Reuters) - Oil fell sharply on Tuesday on fears that politicians would be powerless to stop the debt crisis in Europe spreading to Italy and Spain, reinforcing fears about the outlook for the global economy.
Ministers from the 17 countries that share the European currency on Monday vowed to safeguard stability in the euro area and promised new measures "shortly", but set no deadline after another day of turmoil across financial markets.
Brent crude fell $1.56 to $115.68 a barrel by 10:05 a.m., while U.S. crude for August slid $1.15 to $94.00. Both contracts fell more than $1 on Monday as well.
"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 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.
Brent is still trading at above the level it was trading 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.
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 Merril 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 59.83 million barrels, down 784,000 barrels from an earlier estimate, according to the IEA.
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.
US INVENTORIES EYED
U.S. crude oil inventories probably fell by 2 million barrels, 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.
