September 4, 2012 / 3:12 AM / 5 years ago

Oil down below $115 as demand worries weigh

LONDON (Reuters) - Oil prices fell below $115 per barrel on Tuesday as renewed fears about demand destruction outweighed hopes of further stimulus measures from central banks in the United States and Europe.

Front-month Brent crude futures were down $1 to $114.78 a barrel by 10:13 a.m. EDT (1413 GMT). U.S. crude futures were down 89 cents to $95.58 a barrel from Friday’s settlement. U.S. markets were shut on Monday for the Labor Day holiday.

The market had opened in a bullish mood, but conflicting signals from Europe’s bankers over potential stimulus measures, and weak U.S. manufacturing data triggered a shift in sentiment as U.S. traders arrived at their desks.

Investors had been pinning their hopes on fresh stimulus measures by the European Central Bank on Thursday, but leading German bankers have clashed over the scope of the ECB’s powers, potentially throwing a spanner into the works.

Traders also dumped oil futures after Markit’s PMI data showing sluggish growth in U.S. manufacturing in August. Exports declined for a third straight month and firms were slow to add new workers.

The Institute for Supply Management’s index of U.S. factory activity also fell to 49.6 in August from 49.8 in July, the third month of contraction in a row.

“You need to see demand coming through,” said Michael Hewson, a markets analyst at CMC Markets in London. “And the only way you are going to get demand growth is if oil prices fall. Any upside in oil is going to be limited.”

Traders said that oil prices also seemed to be following the euro down, which crashed to a session low against the dollar. “We’re selling off but there is not a lot of volume going through,” said Rob Montefusco at Sucden Financial in London.

“The change in direction of the euro seemed to be what caused the direction change in crude,” added Phil Flynn, an analyst at Price Futures Group in Chicago.

Flynn also noted the lower open on Wall Street and the fact that, while production restarts in the Gulf of Mexico after Hurricane Isaac are slower than hoped, there doesn’t seem to be any major damage.

Nearly 60 percent of offshore crude oil production in the Gulf of Mexico is still offline, according to U.S. government reports.

STIMULUS HOPES

Montefusco said that the U.S. manufacturing data had been a sign of weakness, and markets were still very nervous.

Investors had pinned hopes on more bond buying by the ECB after president Mario Draghi said on Monday that short-term sovereign bond purchases by the ECB would not breach European Union rules.

But Hewson said there was still some way to go as Germany had yet to ratify the ECB’s new supervisory powers: “Investors aren’t necessarily going to get what they want on Thursday.”

Carsten Fritsch, an energy analyst at Commerzbank in Frankfurt, also pointed to poor oil fundamentals. He said the worsening economic outlook suggested a deterioration in oil demand while supplies remain ample.

“Last week’s OPEC production survey signaled continued over-supply, Russian crude oil production in August was the highest since the end of the Soviet Union, and Iraq has ramped up oil exports to the highest level in three decades, so there is plenty of oil in the market at the moment,” he said.

Additional reporting by Ramya Venugopal and Wang Tao in Singapore and Robert Gibbons in New York; editing by Jason Neely

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