Oil Prices Slump Amid Fading Stimulus Hopes

Published July 31, 2012

| Reuters

Oil prices fell for a second straight day on Tuesday on expectations that any central bank stimulus may be insufficient to revive economic growth, even as hopes dimmed that the U.S. Federal Reserve will act this week to boost the economy.

Supportive data from the United States, including higher home prices, improved consumer confidence and Midwest business activity was seen as lowering the chance of more stimulus from the Fed when its two-day policy meeting ends Wednesday.

"Oil prices are lower on the paradox of slightly better economic data in the form of the Chicago PMI and the consumer confidence reading," said John Kilduff, a partner at Again Capital LLC in New York.

"The slightly positive readings may keep the Fed from acting as fully as the markets have priced in. Also, the comments from various German leaders have taken away some the expectations for ECB action," Kilduff added.

Even with two days of losses, Brent crude remained on pace to post a 7 percent rise in July and to snap a string of three monthly declines.

U.S. crude posted a 3.65 percent monthly gain, ending a two-month streak of declines.

Brent September crude fell $1.47 to $104.73 a barrel by 2:54 p.m. EDT (1854 GMT), having swung from $104.25 to $106.52.

U.S. September crude slumped $1.72 to settle at $88.06 a barrel, having dropped to $87.52 intraday.

Total crude trading volumes remained lackluster, with dealings for Brent and U.S. crude well below 30-day averages.

U.S. gasoline and heating oil futures also ended lower as the front-month August contracts' expired.

Ahead of weekly reports on U.S. oil inventories, crude oil stocks are expected to have dipped and refined products stocks to have risen, a Reuters survey of analysts showed.

The report from the American Petroleum Institute is due at 4:30 p.m. EDT (2030 GMT) on Tuesday.

Slowing growth in the United States, the world's top oil consumer, has fuelled expectations of stimulus measures from the Federal Reserve, which starts a two-day policy meeting on Tuesday, although caution about the likelihood the Fed will act immediately was evident as the meeting neared.

Last week's statement by European Central Bank President Mario Draghi that the ECB would do whatever it takes within the bank's mandate to protect the euro raised expectations of new policy measures to solve the debt crisis when the ECB meets on Thursday.

Germany's finance minister on Tuesday reiterated its view that there is no need to grant a banking license to the euro zone's new bailout fund. Such a move could enable the fund to buy large amounts of debt issued by troubled euro zone economies.

Oil received support early after a pledge by leaders in China, the world's biggest energy consumer, to increase fiscal and monetary support to the economy in the second half of the year.

MIDDLE EAST UNCERTAINTY

Investors remained concerned about tensions between the West and Iran over Tehran's nuclear program and the violence in Syria, even as the global economy has the spotlight.

"For the moment, the economy remains the main focus for most investors; that isn't to say that the situation in Iran and the Middle East isn't of concern," said Ric Spooner, chief market analyst at CMC Markets.

U.S. Secretary of Defence Leon Panetta denied media reports on Tuesday that he would discuss possible military attack plans against Iran during a brief visit to Israel.

Speaking at a press conference in Cairo shortly before departing for Israel, Panetta said he would be talking about "various contingencies", but said specific military plans would not be put forward.

Syrian combat aircraft and artillery pounded two areas of Aleppo as the army battled for control of the country's biggest city, but rebel fighters said troops loyal to President Bashar al-Assad had been forced to retreat.

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