NEW YORK--U.S. oil futures fell sharply on Tuesday as investors fled riskier assets to dollar safety on growing concerns that the European debt crisis could worsen and damage a fragile global economic recovery.
"A further bout of financial market and euro weakness has pulled oil down sharply this morning, and there is background concern about OPEC solidarity and escalating Korean tensions," said Lawrence Eagles, an analyst at J.P. Morgan.
The U.S. dollar index rose 0.9 percent as investors diverted money from commodities into the greenback. .DXY>
The euro fell to an 8-1/2-year low against the yen and neared a four-year low versus the dollar on continued fears the euro-zone sovereign debt crisis is spreading.
U.S. crude was down $1.80 at $68.41 a barrel at 11:53 a.m. EDT.
Market sources noted that crude, down more than $3 earlier, pared losses after the U.S. consumer confidence index hit a two-year high in May.
ICE Brent crude was down $1.87 at $69.30 a barrel.
"It's risk aversion, falling stock markets and a stronger dollar. People are worried the euro zone crisis will spread and derail the global economic recovery," said Carsten Fritsch, an analyst at Commerzbank.
Spain's central bank took over savings bank CajaSur on Saturday, following the failure of its planned merger with another regional lender, and this has weighed on the euro this week.
News that euro zone new industrial orders rose in March at their fastest rate in 10 years did little to improve sentiment in the oil market.
World stocks fell to their lowest level since September 2009 on Tuesday amid growing tension between North and South Korea. Equities are seen as an indicator of future energy demand growth.
U.S. stocks tumbled about 2 percent, tracking a sell-off in global equities, on worries over Europe's banking sector and as short-term funding costs soared.
Bank of America Merrill Lynch on Tuesday cut its oil demand growth forecasts for 2010 to 1.5 million barrels per day from 2 million bpd due to anticipate slower global economic growth in the second half of 2010.
SUPPLY COMFORT
Oil markets remain well supplied, with the Organization of the Petroleum Exporting Countries pumping about 2 million barrels per day above agreed output targets.
While oil is below the $70-$80 range many in OPEC have said they prefer, OPEC officials have stopped short of calling for any steps to prop up prices. OPEC has not made plans for an emergency meeting, the oil ministers for Kuwait and the United Arab Emirates said on Monday.
A preliminary Reuters survey on Monday showed analysts were divided over the direction of U.S. oil inventories last week. The poll of six analysts called for an average drawdown of 100,000 barrels.
Distillate stocks, including heating oil and diesel, were forecast up 300,000 barrels on average.
Crude stocks at the delivery hub for U.S. futures contracts in Cushing, Oklahoma, are at a record high.
The tensions in east Asia could further weigh on oil prices after North Korean leader Kim Jong-il reportedly told his military he might have to go to war if attacked after the sinking of a South Korean ship.
"The impact on oil prices would likely be bearish, since in this area of the world demand would be impacted far more than supply," said Edward Meir at MF Global.
South Korea is the world's fifth-largest crude oil buyer.
UPDATE: EU Rehn: Will Do What Is Needed To Support The EuroEuropean debt worries world
