SINGAPORE: Brent crude slipped below $108 on Thursday, after plunging 2.5 percent in the previous session on worries that Europe's failure to evolve a plan to tamp down the euro zone's debt crisis could hurt oil demand growth.
French President Nicolas Sarkozy flew to Frankfurt to talk with German Chancellor Angela Merkel to try and break a deadlock ahead of a crucial meeting this weekend. Riskier assets such as stocks, metals and commodity currencies fell on the uncertainty, and oil erased gains made last week on rescue deal optimism.
Brent crude slipped 47 cents to $107.92 a barrel by 0528 GMT, after having plunged $2.76 to settle at $108.39 on Wednesday. US oil, which expires on Thursday, fell 79 cents to $85.32, after sliding $2.23 to settle at $86.11.
"It's like the politicians have given markets a reality check," said Natalie Robertson, a commodity analyst at ANZ Bank. "The issues are real and cannot disappear with one plan that comes up over the weekend. Investors are trading cautiously, and oil is tracking equities and the headlines out of Europe."
Plans to tackle the euro zone debt crisis have stalled with Paris and Berlin at odds over how to increase the firepower of the region's bailout fund, Sarkozy said on Wednesday.
France has argued the most effective way of leveraging the European Financial Stability Facility (EFSF) is to turn it into a bank which could then access funding from the ECB, but both the central bank and the German government have opposed this.
"Investors don't want to take positions until there is a clear sign of a resolution of the debt crisis," said Tetsu Emori, a fund manager at Astmax Co Ltd in Tokyo.
Canadian Finance Minister Jim Flaherty called the slow progress "disconcerting" and the head of the World Bank urged policymakers to take definite steps.
"There is room for disappointment as the areas that need to be covered have many inter-related parts and the need for political approval will naturally lead to a less-than-clean outcome," analysts at J P Morgan said in a report.
PRICE OUTLOOK
Still, Barclays Capital said it maintained its crude price forecast of $115 for Brent in 2012, and that, even in the worst case, the downside was unlikely to be as severe as end-2008.
"As a result, we maintain our price forecast of $115 per barrel for Brent in 2012 and expect $90 per barrel to hold as a sustainable floor even under gloomy macroeconomic conditions," Barclays said in a report.
Brent will fall to $106.96 per barrel, going by a Fibonacci retracement analysis, while US oil will slide to $83.95 per barrel, Reuters technical analyst Wang Tao said.
Stemming a further slide in prices on Thursday is data from the US Energy Information Administration that showed crude and petroleum product stocks in the world's biggest oil consumer fell sharply last week as crude imports reached a 10-month low and refineries cut processing rates.
Crude stocks fell 4.73 million barrels to 332.9 million barrels in the week to Oct. 14 compared with an analysts poll by Reuters that had projected a 1.8-million-barrel build on average.
"Fundamentally there are factors to support prices, but the economic uncertainty is weighing on sentiment," Emori said.
Brent has slipped 4.3 percent so far this week, its biggest since the week of Sept. 25, reversing the 6.6 percent gain made in the previous week. US oil has fallen 2 percent this week compared with a 5.3 percent rise in the previous one.
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