Brent crude holds above $107 on call for Iran oil ban Friday, 25 November 2011 08:11

SINGAPORE: Brent crude held steady above $107 on Friday as nagging concerns about a euro zone debt crisis contagion offset threats to supply emerging from France's call for sanctions on Iran's oil exports.

France on Thursday backtracked on comments it had made earlier in the day suggesting it could impose a unilateral ban on Iranian crude oil imports, but it pushed hard to convince allies to impose such sanctions. Other Western governments are concerned that such moves could hurt the world economy as well as Tehran.

The euro zone's persistent debt problems are pushing policymakers to consider issuing a common bond underwritten by all members of the currency bloc as borrowing costs surged.

Brent crude oil futures fell 7 cents to $107.71 a barrel by 0339 GMT after earlier hitting a low of $107.33. The contract is expected to close little changed this week, after declining more than 6 percent last week.

U.S. crude is set for a second week of decline. The January contract rose 25 cents to $96.42 a barrel.

"The European situation is still uncertain," said Tetsu Emori, a commodities fund manager at Astmax Investments in Tokyo. "The crisis is still ongoing and what happened in Germany has made investors quite nervous."

The euro fell on Friday to a fresh seven-week low against the U.S. dollar, carrying over weakness triggered by the comments of German Chancellor Angela Merkel, who said on Thursday still does not think common euro zone bonds are necessary.

A weak debt sale in Berlin this week fanned fears the debt crisis was starting to threaten Europe's biggest economy.

Oil is priced in dollars and it tends to weaken when the greenback strengthens and becomes less affordable for holders of other currencies, prompting investor risk aversion.

France and Germany agreed on Thursday to stop bickering openly over whether the European Central Bank should do more to rescue the euro zone, while expressing their backing for Italian Prime Minister Mario Monti in his task of overcoming the country's massive debt burden.

MIDEAST UNREST

Turmoil in the Middle East, and winter demand, gave oil more resilience than other commodities.

France's call for sanctions on Iranian oil exports, and any potential military action, may cut supply from OPEC's second largest producer and disrupt oil trade at the Strait of Hormuz, the world's most important oil transit channel.

"Escalation of rhetoric towards Iran's nuclear programme has supported oil prices in recent weeks, competing with the gloomy economic headlines as the main driver of oil prices," Gordon Kwan, head of oil research at Mirae Assets Securities in Hong Kong said in a research note.

While France's push for a European oil embargo on Iran could raise the geopolitical premium on oil prices in the coming months, the proposal could face resistance from other EU members Italy and Spain, the two largest buyers of Iranian crude in the region, Kwan said.

"Potential military confrontations against Iran should help Brent oil price maintain a $10-$15 a barrel premium over the WTI oil price during 2012," he said.

Brent's premium against West Texas Intermediate crude <CL-LCO1=R> has narrowed to $11.29 a barrel from $17.75 a month ago.

Plans to reverse the Seaway pipeline in the United States that will reduce a glut at delivery point Cushing, Oklahoma, have pushed WTI prices higher while a ramp-up of output at Libya has capped gains in Brent.           (Reuters/Florence Tan)