Crude futures on both sides of the Atlantic fell in early trade by more than 2 percent as Italian 10-year bond yields rose well above 7 percent, a level widely deemed unsustainable. This triggered sharp falls in equities and lifted the dollar against the euro.
By midmorning, US crude started to pare losses after government data showed a larger-than-expected draw in domestic crude inventories in the week to Nov. 4.
In choppy trading in London, ICE Brent crude for December delivery was down 92 cents at $114.08 a barrel by 12:45 p.m EDT (1745 GMT), after dropping to a session low of $112.36. The contract fell for the first time in four sessions, having settled on Tuesday at its highest level since Sept. 15.
“People are scared that Italy’s too big to bail out,” said Michael Hewson, analyst at CMC Markets.
“It’s driving people out of risky assets and it’s reinforcing fears about a double-dip recession, which will hit demand sensitive assets like oil.”
US crude for December was up 16 cents at $96.96, gaining for a sixth day in a row and hitting a high of $97.84, the highest since July 27. Gains were curbed ont worries about the euro zone economy and its impact on world oil demand.
Brent’s premium against US crude narrowed to around $17, from $18.20 at the close on Tuesday.
Midday trading volume midday was heavier for Brent at more than 1 percent above its 30-day average, according to Reuters data. US crude volume was 23 percent below its 30-day average.
US crude inventories fell more than expected, by 1.4 million barrels last week on lower imports, data from the US Energy Information Administration showed.
Distillate stocks, which include heating oil and diesel fuel, plunged more than 6 million barrels, with average four-week demand rising 3.9 percent from the year ago level.
Gasoline stocks fell 2.1 million barrels, their lowest weekly level since June 2009, defying forecasts for a modest build.
“Today’s EIA data was bullish across the board, with a big draw for crude and product stocks (but) headlines out of Europe,specifically Italy, will likely remain the large elephant in the room for the direction of energy prices,” said Chis Jarvis, president at Caprock Risk Management in Rye, New Hampshire.
“With the euro weakening today, it will be difficult for commodity prices, including oil, to move higher given the global macroeconomic backdrop,” Jarvis added.
Also providing some support to the oil market, Britain’s Foreign Secretary William Hague said the government is looking at imposing further sanctions against Iran’s financial and energy sectors because of its nuclear work.
The euro slid against the dollar, extending losses after midday after euro zone officials said they had no plan to rescue Italy.
German Chancellor Angela Merkel said Europe’s plight was now so “unpleasant” that deep structural reforms were needed quickly, calling for changes in EU treaties to accelerate and deepen integration of the euro zone countries.
There is now a 60 percent chance of a euro zone recession, according to the consensus of 250 economists, up sharply from 40 percent in a Reuters poll conducted in October.
Europe’s sovereign debt crisis was cited by OPEC as a risk to expectations for demand growth in the producer group’s 2011 World Oil Outlook.
