NEW YORK (Reuters) – Oil prices dropped 3 percent on Monday as worries that Spain is headed for a bailout and the euro zone debt crisis is spreading sent investors away from riskier assets to the perceived relative safety of the dollar and U.S. debt.
Crude futures fell for a second straight session after Spain’s central bank said that country’s economy sank deeper into recession in the second quarter.
Friday’s announcement by Spain’s Valencia region that it would need help from Madrid was followed by weekend reports that an official from Murcia said it would also tap the program and that Catalonia, Castilla La Mancha, the Balearics, Canary Islands and Andalucia may follow.
“There are fears this could be the beginning of a domino effect, which ultimately leads to Spain having to join Greece, Portugal and Ireland in asking for an official rescue,” said Carsten Fritsch, an energy analyst at Commerzbank in Frankfurt.
The Thomson Reuters CRB index, a global commodities benchmark, fell 1.59 percent on Monday, after gaining 3.6 percent last week. The 19-commodity index has added 5 percent so far for July, heading for the strongest month since October 2011.
Crude prices hit eight-week highs on Thursday, before easing on Friday as the concerns about Spain began their most recent spotlight grab.
Brent September crude fell $3.20 to $103.63 a barrel at 12:15 p.m. EDT (1615 GMT), having fallen as low as $102.42 intraday.
U.S. September crude, in the front-month spot following Friday’s August contract expiration, was down $2.96 at $88.87 a barrel, after slipping to $87.94.
Brent and U.S. crude last week posted weekly gains of more than 4 percent, even with Friday’s losses. On Monday, the markets were down more than 4 percent at one point.
Trading volumes for both Brent and U.S. crude remained thin, about 50 percent below 30-day averages at midday in New York.
U.S. August gasoline and heating oil futures also were pressured, with gasoline seesawing either side of its 200-day moving average of $2.8747 a gallon intraday.
Also weighing on oil prices and hitting Chinese equities were comments by an adviser to the People’s Bank of China over the weekend saying that the No. 2 oil consuming nation may see more slowing in the third quarter, easing to 7.4 percent, following the 7.6 percent official second-quarter GDP growth. .HK
“Comments at the weekend by a member of the monetary policy committee of the People’s Bank of China (are) adding to the downward pressure,” Addison Armstrong, senior director, market research at Tradition Energy in Stamford, Connecticut, said in a research note.
The euro hit a two-year low against the dollar intraday on Monday on concerns about Spain and as Spanish bond yields soared to their highest levels since the euro was created.
The euro briefly pared losses against the U.S. currency after the International Monetary Fund said it will meet with Greek authorities on Tuesday to discuss how to get the country’s economic program, another euro zone trouble spot, “back on track.
U.S. Treasury yields fell to record lows as concern about the euro zone had investors buying U.S. debt as a safe-haven.
Wall Street tracked a sharp selloff in global equity markets on Spain’s appearing to be closer to needing a bailout and fears that Greece may be approaching an exit from the euro zone.
Copper, a key industrial feedstock, hit a three-week low on revived worries about demand for the metal as Europe’s debt crisis deepens.
(Additional reporting by Gene Ramos in New York, Claire Milhench in London and Jessica Jaganathan in Singapore; Editing by Maureen Bavdek and Bob Burgdorfer)
