Oil falls on worries over Spain, China

LONDON (Reuters): Brent crude oil fell on Wednesday, as fears intensified about the future of Spain’s banks, while China signalled it was not planning a large stimulus package, dimming demand prospects.

Oil recovered some losses after the European Commission called for sweeping reforms to restore investor confidence.

However, the move failed to turn around the negative tone of the market.

Spain will soon issue new bonds to fund its ailing banks and indebted regions, even while its borrowing costs neared the unsustainable 7 percent level, which forced other euro zone countries to seek international aid. Feeding fears that China, the engine of global growth, will not grow as fast has hoped, influential academics said Beijing should shun aggressive fiscal stimulus, in remarks published in leading state-backed newspapers on Wednesday.

They joined a chorus of commentary countering market expectations that China might unveil a stimulus package similar to the 4 trillion yuan ($630.1 billion) in spending unleashed during the global financial crisis.

Brent crude slid $2.34 to $104.35 per barrel by 1330 GMT. It reached its lowest since December, and was down around 12.6 percent so far in May, its biggest such fall in two years.

U.S. crude was down $1.91 at $88.85 per barrel.

For the month, the U.S. benchmark has fallen even faster, weighed by a surge in domestic stockpiles. It has fallen 15.3 percent, its biggest fall since late 2008.

Crude stocks at the Cushing, Oklahoma, storage hub, delivery point of the U.S. crude oil future contract, have risen to a record high of 46.8 million barrels.

“The European debt crisis and concerns about Chinese economic growth together mean that sentiment is on the very bearish side,” said Andy Sommer at EGL in Dietikon, Switzerland.

IRAN SUPPORT

But oil’s losses may be checked by supply concerns as Iran’s dispute with the West over Tehran’s nuclear programme remains unresolved.

Some analysts also saw scope for support as the increase in supply from some countries is seen as levelling off.

“Oil will gradually climb higher, with the ban of Iranian oil starting to make an impact,” said Sommer at EGL.

“Demand is always higher in the second half, while we won’t continue to get incremental growth to supply from Libya, and Saudi Arabia won’t go on increasing production.”

Tehran is refusing to grant United Nations inspectors access to a facility at Parchin, which is suspected of being used to develop nuclear weapons. Iran says its aims are entirely peaceful.

Iran has ramped up its production of low-enriched uranium in the past five years, and it could be used for at least five nuclear weapons if refined further, the U.S.-based Institute for Science and International Security said.

Iraq, which has the potential to increase supply substantially, said average oil exports in May were at 2.4 million barrels per day so far, compared with an average of 2.508 million bpd for April.

Iraq started its fourth energy bidding round to allow international companies to compete for exploration deals on 12 new oil and gas areas as the OPEC-member country seeks to expand its crude reserves and become a major gas exporter.