NEW YORK (Reuters) - Oil prices fell on Tuesday in choppy trading, faltering after a downgrade of Spain's credit rating sent the euro to nearly a two-year low against the dollar.
Egan-Jones Ratings cut Spain's credit rating for the third time in less than a month, which weakened the single currency and rekindled fears of a spreading debt crisis in the euro zone.
"Crude oil prices dropped as soon as the Egan-Jones downgrade of Spanish debt was announced," said John Kilduff, partner at Again Capital LLC in New York.
"The reaction highlights the nervous state of the markets over the slow creep toward the precipice of a market disruption event in the euro zone," he added.
Before the downgrade, oil and equities had risen on optimism about polls showing leads for Greek political parties in favor of austerity and a report that China's biggest banks have accelerated lending.
Also supportive for oil were revived concerns about supply disruptions because Iran's dispute with the West over Tehran's nuclear program remains unresolved.
Brent crude for July delivery fell 43 cents to settle at $106.68 a barrel, having swung from $106.06 to $107.95.
U.S. crude oil futures lost 10 cents to settle at $90.76 a barrel, off a high of $92.21. U.S. investors returned to the markets after Monday's U.S. Memorial Day observance.
Brent's premium to U.S. crude ended at $15.92 based on settlements.
Total crude trading volumes for Brent were 13 percent below the 30-day average, with U.S. turnover 20 percent below its 30-day average.
U.S. RBOB gasoline futures held gains ahead of Thursday's front-month June contract expirations for gasoline and U.S. heating oil.
Gasoline received support from expected stronger fuel demand after the Memorial Day weekend, which marks the traditional start of the U.S. summer driving season, and from recent sharp drops in fuel inventories.
U.S. stocks rose on renewed hopes Greece will stay in the euro zone, but gains in equities were curbed by Spain's problems and by Facebook Inc's (FB.O) drop under $30 a share. .N
Industrial feedstock copper fell for the first time in four sessions after the news of Spain's credit downgrade. <MET/L>
The Reuters/Jefferies CRB index of commodities .CRB eased 0.78 percent.
Oil's decline was limited by fears that talks between major powers and Iran will fail to defuse the dispute over Tehran's nuclear program. Tensions have kept investors cautious after inconclusive discussions last week.
Iranian officials have thus far declined to grant U.N. inspectors access to a complex at Parchin, the center of Western suspicions that Iran is developing nuclear weapons capability.
Iran has significantly stepped up its output of low-enriched uranium, and production in the last five years would be enough for at least five nuclear weapons if refined much further, the U.S.-based Institute for Science and International Security (ISIS) said.
The analysis was based on data in the latest report by the U.N. International Atomic Energy Agency (IAEA).
Six world powers failed to persuade Iran last week to halt its most sensitive nuclear work, but they will meet again in Moscow next month.
U.S. crude oil stockpiles were expected to have increased last week as imports continued to be robust, a preliminary Reuters survey of analysts showed. <ID:L1E8GTBIJ>
Distillate and gasoline stocks were seen little changed.
Oil inventory reports will be delayed due to Monday's U.S. holiday. Industry group the American Petroleum Institute will release data on Wednesday at 4:30 p.m. EDT (2030 GMT), with the government's report following on Thursday at 11 a.m. EDT (1500 GMT).
OPEC output in May hit its highest since 2008 as Saudi Arabia maintained high rates and Iranian shipments did not fall substantially more ahead of a European Union embargo set to start in July, a Reuters survey found on Tuesday.
Additional reporting by Matthew Robinson in New York, Julia Payne in London; and Luke Pachymuthu in Singapore; Editing by David Gregorio and Dale Hudson