Oil dips below $118 on euro zone worries

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Oil dipped below $118 a barrel on Monday as investor concern about the euro zone economy offset stronger-than-expected demand growth in China.

Trade is set to be limited this week as many Asian markets are shut due to the Lunar New Year. On Friday, Brent crude hit a nine-month high after data showed Chinese trade surged in January.

"We could see a bit of a pullback today in oil prices in the absence of any significant external factors, including the lack of activity in Asia," said Michael Hewson, analyst at CMC Markets.

Brent crude was down $1.03 to $117.87 a barrel by 1442 GMT, after slipping to $117.54. U.S. crude was off 43 cents to $95.29.

While Chinese growth is supporting oil prices, developments in the euro zone continue to weigh on equities and the euro. A corruption scandal is threatening political instability in Spain and Italy's election race is becoming tighter.

Germany, France and Italy will release later this week their latest quarterly gross domestic production (GDP) figures, which are expected to point to a contraction in the three key European economies.

The recent rally in Brent prices on the back of an overall positive economic outlook could turn around as oil prices could weigh on the recovery, analysts said.

"The long-term trend for oil prices is on an upward path, but is it in the best interest of OPEC countries to have it at $120 a barrel while European GDP starts slipping back? That could cause a demand break," according to Hewson.

Similarly, David Hufton of PVM said the market's recent rally "...can turn into panic again very quickly, taking the wall of money with it.

"Should oil bulls be worried about the run-up in oil prices? Stock market bulls should be, because there is the sniff of an oil price shock in the air and the blame game is beginning," Hufton said.

Traders will be watching U.S. retail sales and industrial production figures later this week for further indications of economic growth in the world's largest economy.

Oil could get some support from stormy weather in the heavily populated U.S. Northeast, where a blizzard dumped up to 40 inches (1 metre) of snow with hurricane force winds, leaving hundreds of thousands of people without power.

U.S. gasoline front-month futures took a hit on Monday, dropping 1.24 percent to $3.021 a gallon, as the inclement weather reduced transportation.

Washington and Tehran may have more time to negotiate regarding Iran's disputed nuclear programme after news that Iran appears to have resumed converting small amounts of its higher-grade enriched uranium into reactor fuel.

Slowing a growth in stockpiles of material that could be used to make weapons is one of the few ways in which the nuclear dispute could avoid hitting a crisis by the summer.

The dispute has led to concern about Middle East supply for years. Iran has threatened to block shipments through the Strait of Hormuz in the event it is attacked. Some 40 percent of the world's globally traded oil passes through the strait. (Additional reporting by Rebekah Kebede in Perth and Alex Lawler in London; editing by James Jukwey and Jason Neely)



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