Oil Drops on Eurozone Concerns

Oil prices fell sharply on Monday, down a second straight day, as worries that Spain is headed for a bailout and the euro zone debt crisis is spreading prompted investors to sell assets perceived as risky, boosting the dollar and U.S. debt.

Brent fell more than 3 percent and U.S. crude fell 4 percent, with both posting their biggest one-day percentage losses since June 21, after Spain's central bank said that country's economy sank deeper into recession in the second quarter.

Friday's announcement by Spain's Valencia region that it would need help from Madrid was followed by weekend reports that Murcia appeared on course to ask for assistance.

"There are fears this could be the beginning of a domino effect, which ultimately leads to Spain having to join Greece, Portugal and Ireland in asking for an official rescue," said Carsten Fritsch, an energy analyst at Commerzbank in Frankfurt.

Crude prices hit eight-week highs on Thursday, then eased on Friday as concerns about Spain heightened.

Brent September crude fell $3. 57 to settle at $ 103. 26 a barrel, having fallen as low as $102.42 intraday.

Following Friday's August contract expiration, U.S. September crude fell $3.69 to settle at $88.14 a barrel, having dropped as low as $87.94 intraday.

Brent and U.S. crude last week posted weekly gains of more than 4 percent, even with Friday's losses, as violence in Syria, tensions between Iran and the West, and North Sea production disruptions provided lift for oil prices.

The Thomson Reuters CRB index, a global commodities benchmark, fell 1.93 percent on Monday after gaining 3.6 percent last week.

Trading volumes for both Brent and U.S. crude remained thin, about 30 percent below 30-day averages.

U.S. August gasoline and heating oil futures also were pressured, with the distillate benchmark losing more than 10 cents.

News of U.S. refinery problems helped August gasoline settle only 6 cents down at $2.8829 a gallon, after retreating below the 200-day moving average of $2.8747 intraday.

Ahead of weekly reports on U.S. oil inventories, crude stocks were expected to have remained flat, with products stockpiles easing only slightly, a Reuters survey of analysts on Monday showed.

Also weighing on oil prices and Chinese equities over the weekend, an adviser to the People's Bank of China said economic growth in the No. 2 oil consuming nation may slow more in the third quarter.

The euro hit a two-year low against the dollar intraday on Monday on concerns about Spain and as Spanish bond yields soared to their highest levels since the euro was created.

The euro pared losses when the International Monetary Fund said it would meet with Greek authorities on Tuesday to discuss how to get the country's economic program "back on track."

U.S. Treasuries rallied, sending yields to record lows as the euro zone concerns had investors buying U.S. debt as a safe-haven.

Wall Street fell, as did global equity markets, on Spain's appearing to be closer to needing a bailout and fears that Greece may be approaching an exit from the euro zone.

Copper, a key industrial feedstock, hit a three-week low on revived worries about demand for the metal as Europe's debt crisis deepens.

MIDDLE EAST UNCERTAINTY

Turmoil in Syria and tensions between Iran and the West over Tehran's nuclear program kept investors wary of the potential for the region's oil supplies to be disrupted.

As international pressure continues on President Bashar al-Assad's government, Syria acknowledged on Monday that it had chemical and biological weapons and said it could use them if foreign countries intervened in Syria's civil war.

Moderating recent threats from Iranian officials about shutting the vital oil shipping lane, a military commander was quoted on Monday as saying Iran would not close the Strait of Hormuz as long as it is able to use the shipping lane itself.