Oil prices fell on Tuesday as a contraction in Britain's economy and India's interest rate hike to rein in inflation fuelled concerns about economic growth and the effect of rising commodity costs. Commodity markets felt pressure from concern that monetary tightening in India and China, intended to curb inflation, might continue as raw materials and food costs rise.
The 19-commodity Reuters Jefferies CRB index fell more than 1 percent, heading for its largest one-day loss since January 6. US oil fell a sixth straight session for the first time since July 6, as investors awaited weekly oil inventory reports expected to show crude stocks rose last week.
US crude oil for March delivery fell $1.68, or 1.91 percent, to settle at $86.19 a barrel, trading as low as $86.12, lowest since prices fell to $83.63 on December 1. Traders and analysts said crude had technical support near the March contract's 100-day moving average just above $86.
In London, ICE Brent crude for March fell $1.36, or 1.41 percent, to $95.25. "Maybe, just maybe, there are still risks in this global economy of ours," Phil Flynn, analyst at PFGBest Research in Chicago said, referring to data showing Britain's economy contracted in fourth-quarter 2010 as December's heavy snow took more of a toll than forecast.
The UK surprise and India's interest rate hike designed to clamp down on inflation added to concerns about slower economic growth already fanned by China's recent efforts to curb overheated inflation. Focus on the threat from commodity inflation to economic growth came on the first day of the US Federal Reserve's two-day policy meeting. Investors await the Fed's announcement on Wednesday at 2:25 pm (1915 GMT) to sift out any policy changes.
The spread between the US front-month March and April crude contracts was around $1.70, keeping the incentive in place to buy and store crude in order to sell it at higher prices in future months. "The WTI forward curve has steepened further at the front end, because the front-month futures contract has come under greater pressure than the contracts thereafter," Commerzbank analysts said in a note.
High US crude inventories, especially at the Cushing, Oklahoma, delivery point for the US crude contract, have helped keep US crude prices below Brent. Brent crude's premium over US benchmark West Texas Intermediate (WTI) crude seesawed but hovered near $9 a barrel after reaching $9.76 on Monday.
US crude oil inventories were expected to have risen last week as imports increased, a Reuters poll of analysts showed ahead of data from industry group the American Petroleum Institute due at 4:30 pm EST (2130 GMT) on Tuesday. Crude stocks were forecast to rise a second straight week, with gasoline stockpiles also seen higher. Distillate stocks, which include diesel fuel and heating oil, were expected to be lower on increased heating demand. The API report will be followed by the US Energy Information Administration's data to be released on Wednesday at 10:30 am EST (1530 GMT).
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