LONDON, (Reuters) – Oil prices fell on Friday as worries about Europe’s debt crisis helped send the dollar to fresh highs against the euro, outweighing the support offered by the prospect of European sanctions against Iranian crude.
Italy’s debt sale on Friday added to investors’ worries as both short and longer term borrowing costs in Europe’s third largest economy soared to euro lifetime highs.
No relief was offered from Europe’s leaders, who remained divided over the region’s debt crisis as Germany’s resolute opposition to a joint euro zone bond continued.
“There are talks and talks, but nothing happens,” said Thorbjoern Bak Jensen, an analyst at A/S Global Risk Management Ltd.
Brent crude oil futures fell $1.27 to $106.51 a barrel by 1152 GMT. U.S. crude was 58 cents lower at $95.59 a barrel around the same time.
Oil, along with other dollar-denominated commodities, tends to be negatively correlated with the dollar as it becomes more expensive for holders of other currencies.
The dollar was trading at a seven-week high against the euro and was more than 0.5 percent up against a basket of currencies around the same time.
Bak Jensen said Europe’s economic indicators pointed to the region’s declining health, while hopes were pinned on the U.S. where economic data appeared to reflect a marked improvement in growth.
A disastrous debt sale in Berlin earlier this week has increased worries about European growth, and was seen to indicate that Europe’s biggest economy was not immune to the spreading debt crisis.
“The European situation is still uncertain,” said Tetsu Emori, a commodities fund manager at Astmax Investments in Tokyo. “The crisis is still ongoing and what happened in Germany has made investors quite nervous.”
Expectations grew of European sanctions on imports of crude oil from Iran after a slip by a French government official mistakenly suggested Paris was about to unilaterally ban Iranian crude.
Iran is OPEC’s second-largest oil producer and Italy, Spain and Greece rely on Iran for around 13 percent of their crude oil needs, according to U.S. government data.
Italy’s oil industry body said sanctions prohibiting imports of crude oil from Iran were seen to be inevitable and would come at a cost to the region’s oil companies.
Turmoil in the Middle East and winter demand has supported oil above other commodities.
Potential military action involving Iran could disrupt oil trade at the Strait of Hormuz, the world’s most important oil transit channel, as well as cutting off supply from the OPEC producer to the West.
“Escalation of rhetoric toward Iran’s nuclear program has supported oil prices in recent weeks, competing with the gloomy economic headlines as the main driver of oil prices,” Gordon Kwan, head of oil research at Mirae Assets Securities in Hong Kong. said in a research note.
While the push for a European oil embargo on Iran could raise the geopolitical premium on oil prices in the coming months, the proposal could face resistance from some EU members.
Some Western governments are concerned that such moves could hurt the world economy as well as Tehran.
High oil prices could “strangle” efforts to get the global economy back on its feet and may also hamper Asia’s ability to help the West emerge from its crisis, the International Energy Agency’s Chief Economist Fatih Birol said on Thursday.