Oil Drops Toward $68 as Risk Aversion Returns

Oil extended a drop towards $68 on Tuesday on growing concern that Europe's debt crisis would derail the global economic recovery, prompting investors to sell riskier assets in a flight to dollar safety.

The greenback gained almost 0.8 percent against a basket of currencies on Tuesday, while Japan's Nikkei average fell 3.1 percent to its lowest close in six months following a steep drop on Wall Street.

U.S. light, sweet crude [CLC1  67.799995    -2.41  (-3.43%)   ] for July delivery fell as much as $2.16 to $68.05 a barrel and was down on the day.

London Brent crude  [LCOC1  68.79    -2.38  (-3.34%)   ] slid.

"The market got ahead of itself, building in a lot of anticipation that the economy and oil demand would recover," said Tony Nunan, a risk manager with Tokyo-based Mitsubishi, referring to U.S. crude's 19-month high above $87 hit in early May.

"The fact that the dollar is strengthening is a sign of risk aversion and deleveraging. People are moving away from crude oil," Nunan said, adding that Fibonacci chart analysis showed prices would head towards $66.24.

Europe's fumbling response to a debt crisis in Greece and bulging deficits in other euro zone countries has unnerved markets over the past six weeks, and the central bank takeover of a small Spanish lender at the weekend stoked fears of a wider meltdown.

The crisis has overshadowed positive economic indicators showing that emerging and OECD nations are returning to growth after the worst recession of the post-war era.

"A lot of the economic indicators are positive, but the reality is that we have to admit that oil supply is keeping ahead of demand," Nunan said.

Last Thursday, U.S. crude touched $64.24, the lowest for a front-month contract since prices fell to $62.76 on July 30, 2009. The June contract expired that day.

"Demand is recovering, but OPEC has been slipping steadily over its production target," Nunan said.

Most estimates suggest production from the Organization of the Petroleum Exporting Countries has been rising since early 2009 as higher oil prices have encouraged members to relax adherence to output cuts announced in December 2008.

OPEC's compliance with the 4.2 million bpd of promised cutbacks has fallen to around 51 percent, according to Reuters estimates.

OPEC is worried about the oil price fall and is watching market developments closely, but it is too early to say if the producer group needs to take any action, Libya's top oil official said on Monday.

But Kuwait's Oil Minister Sheikh Ahmad al-Abdullah al Sabah said on Tuesday OPEC was not concerned about the recent drop in prices and had no plans to call an extraordinary meeting.

Oil Spill Off Singapore

A tanker and a bulk carrier collided in Malaysian waters off Singapore on Tuesday at 6:05 am (11:05 pm London time on Monday), Malaysian coast guard officials said, spilling 2,000 metric tons of oil close to the world's largest bunkering port.

The tanker Bunga Kelana 3 was carrying light crude oil and condensate when it was involved in the collision with bulk carrier MV Waily in waters between Malaysia and Singapore.

A preliminary Reuters survey 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, but the group was evenly divided on how inventories shifted.

Distillate stockpiles including heating oil and diesel probably climbed 300,000 barrels, the poll showed, while views were mixed on whether gasoline supplies shrank or grew.

The analysts issued their forecasts ahead of weekly inventory data from industry group American Petroleum Institute, due on Tuesday at 4:30 pm New York time, and government statistics from the Energy Information Administration scheduled at 10:30 am New York time on Wednesday.