Oil falls towards $105, economy jitters return

LONDON (Reuters):  Oil prices slipped towards $105 on Friday as some London traders cashed in on a sharp move up in Brent at the close of the U.S. session and as negative sentiment around UK banks returned, reminding investors of the worrying global economic outlook.

Brent crude futures were down 57 cents to $105.16 a barrel at 1140 GMT, following Thursday’s strong performance, where Brent closed $3 up.

U.S. crude was down 30 cents to $82.29 a barrel, after settling up $2.91 a barrel on Thursday.

Traders in London expressed surprise at the strong close in the United States in the previous session and suggested the move downwards on Friday reflected profit-taking by the European market.

Also weighing on oil prices was the news that credit agency Moody’s had cut its ratings on British banks Lloyds and Royal Bank of Scotland and that the UK government would have to continue to support the country’s systemically important financial institutions.

“It’s all tied in to the wider confidence in the economy,” said Simon Wardell, an oil analyst at IHS Global Insight. “Things look a bit shakier today. Talk that the UK might have to bail out RBS again seems to be fairly negative. It’s just a sentiment change.”

The oil markets remain on track for weekly gains after the European Central Bank (ECB) announced steps to recapitalise banks, easing concerns about the region’s economy and demand for fuel and energy.

“We are seeing a consolidation move after yesterday’s strong gains, which were caused by external factors such as the hopes of reviving Europe’s banking system, the decisions by the ECB and the Bank of England, and rising stock markets,” said Carsten Fritsch, an analyst at Commerzbank in Frankfurt.

Michael Hewson, an analyst at CMC Markets, also attributed yesterday’s strong close to the liquidity injections from the ECB and the Bank of England.

“If you flood the market with liquidity, that liquidity has got to go somewhere,” he said. “(The moves by the two central banks) have made people think it’s only a matter of time before the Fed follows suit. I think they could be waiting a long time for that to happen.”

Traders and investors are also looking to crucial U.S. jobs data expected later to take the temperature of the world’s biggest economy.

Commerzbank’s Fritsch suggested the week’s late rally might prove to be short-lived given the negative economic outlook. “Prices may come down again today depending on the U.S. non-farm payrolls this afternoon.”

Oil prices will also come under pressure as supplies increase. Rising output from Libya and other oil-producing regions is weighing on crude along with the broader economic weakness, the head of Exxon Mobil Corp said on Thursday.

Olivier Jakob, oil analyst at Petromatrix in Switzerland, said that Brent needs to close above $105 a barrel to maintain some momentum next week.

“The problem is that buying above that level one needs to have a next target at $110 a barrel and a great confidence in the global economy for the sustainability of such price levels,” he said.