European concerns drag on oil prices

Oil fell more than US$1 to below US$74 a barrel overnight as renewed concerns about the health of the European banking sector raised further doubts about the ongoing economic recovery and the outlook for energy demand.

But an explosion at a major oil refinery in Mexico saw prices rise off their lows on expectations Mexico will have to import more oil products from the United States and other trading partners in the coming months.

US crude fell US$1.01 a barrel to US$73.59 at 5.14am NZT, but was more than US$1 above earlier low of US$72.63. Brent crude was up 29 cents from Monday's close to US$77.17.

There was no settlement price for US crude on Monday because of the Labor Day holiday.

US and European equity markets were both down on concerns about the banking sector after the Wall Street Journal reported bank stress tests intended to measure the strength of major lenders understated their holdings in potentially risky government debt.

"Equities came off, the dollar is strong - it's pretty much a knock-on effect," said Rob Montefusco, an oil trader at Sucden Financial.

Brent crude in London remained at an atypical premium to US crude as brimming inventories weighed on the US benchmark. Physical crude markets in Europe are relatively strong in part because of a tight export program for Russian crude Urals.

A gauge of the US job market declined in August, underscoring concerns about the prospects for oil demand in the world's top consumer.

The Conference Board, a private research group, said its Employment Trends Index fell to 96.7 in August from a revised 97.4 in July, signaling US employment growth may continue to slow in coming months.

The dollar was up 0.6 percent against a basket of currencies as traders shed riskier assets. A strong dollar can weigh on oil as it makes crude more expensive for other currency holders.

MEXICO EXPLOSION

Prices took some support after an explosion ripped through a major refinery in northern Mexico on Tuesday, state oil company Pemex said.

Pemex confirmed at least one person was killed in the blast, which it said occurred following a leak in a compressor at the diesel making unit at the refinery that resulted a brief fire.

Rescue workers said at least five people were seriously injured in the explosion. The Cadereyta plant is Mexico's most complex, with a capacity of 275,000 barrels per day.

The blast could force Mexico, which already relies on imports for more than 40 percent of domestic gasoline demand, to significantly boost fuel imports.

"It could well raise oil product prices as Mexico needs to increase imports," Antoine Halff, Deputy Head of Research at Newedge Group in New York said.

"If the refinery is down for a long time it will almost certainly draw oil products, especially gasoline, from the United States. For the US it could definitely be an outlet for gasoline and other oil products where stocks are currently very high."

Mexico bought 432,000 barrels a day of fuel from the United States in June, making it the top importer of US refined products, according to the US government.

Monday marked the end of the US driving season, the period when gasoline demand rises as people go on vacation. This, and high unemployment in the world's top consumer, has raised concerns about the outlook for demand.

"Figures (from the United States) started to be a little better... But there is still no job creation, there is still a lot a debt around," Montefusco said. "The only pick up we are getting is coming out of Asia."

Prices took some support from hurricane fears.

Tropical Storm Hermine formed early on Monday and made landfall in northern Mexico near the US border, according to the US National Hurricane Center. It has not disrupted crude oil and refinery output in Mexico and Texas.

The Atlantic hurricane season runs from June 1 through Nov. 30 and is at its peak period. Traders watch out for storms because the Gulf of Mexico is home to about 30 percent of US oil output.

- Reuters