Brent fell below $109 on Tuesday after posting its largest gains in a month in the previous session as investors took profits and watched keenly to see how Europe would tackle its debt crisis at a meeting later in the day.
The euro zone's debt crisis has become the biggest threat to the global economy and a break up of the currency zone can no longer be ruled out, the Organisation for Economic Cooperation and Development (OECD) said on Monday, slashing its forecasts and urging the ECB to play a bigger role in defusing the crisis.
The euro zone has already entered a mild recession but much worse could follow unless policy makers take decisive action to get ahead of the market, it added. "Oil prices coming off could be also due to some profit taking," said Natalie Robertson of ANZ. "But I think the market tonight will be more focused on developments out of Europe and that would offset any changes in supplies." Brent crude slipped 32 cents to $108.68, while US crude fell 72 cents to $97.48 a barrel by 0328 GMT.
Fitch Ratings's revision of the US credit rating outlook to negative weighed on US oil prices with expectations for an increase of 1.0 million barrels in domestic crude stocks further adding to this.
The ratings agency gave the United States until 2013 to come up with a credible plan to tackle its ballooning budget deficit or risk a downgrade of the country's coveted AAA rating. But a major influence on prices will come from Tuesday's meeting of finance ministers of the 17-nation euro currency area who are expected to approve detailed rules for a €440-billion bailout fund to help attract cash from private and public investors to its co-investment funds. Sanctions against Iran over its nuclear program will also influence the market. "Oil prices will be supported because there are geopolitical tensions over Iran's nuclear program. That would provide a floor on prices," Robertson said.
Paris has argued that Europe should ban Iranian oil as part of Western steps to ratchet up pressure on Iran, following a report by the International Atomic Energy Agency that suggested Iran had worked on designing an atom bomb.
Diplomats say EU powerbrokers Britain and Germany support the proposal, although London is still doing an analysis of the costs. But some EU states, led by crisis-stricken Greece, have expressed concerns about the economic impact of an oil embargo.