Oil hits 6-month low as risk aversion sweeps markets

Oil dropped more than 3 percent o n W ednesday to the lowest level in nearly six months as fears about the euro zone crisis sparked an erosion in risk appetite across markets.

Prices for Brent and U.S. West Texas Intermediate futures headed toward their biggest monthly drop since the financial crisis of 2008, with U.S. oil breaking below a key technical level as investors headed to safer havens.

Rising borrowing costs for Spain and Italy and the latest poll showing a lead for Greece's left-leaning, anti-austerity parties ahead of next month's election added to concerns about the region's economy.

The crisis, and the potential impact on fuel demand, has helped knock Brent prices off 2012 peaks over $128 hit in early March to near $100 a barrel. Equities and other commodities, including industrial feedstocks platinum and copper, also fell.

U.S. stocks on Wall Street fell more than 1 percent, with European equities also posting sharp losses while benchmark U.S. Treasury yields hit the lowest level in at least 60 years.

"This is about a global slowdown, European concerns, and a lack of liquidity," said Richard Ilczyszyn, chief market strategist and founder of iitrader.com LLC in Chicago.

"Funds have run for the hills, and I believe those were the guys who were propping up the market."

The Thomson Reuters-Jefferies CRB index, a global benchmark for commodities, tumbled 1.68 percent to the lowest levels since September 2010.

Brent July crude fell $3.21 to $103.47 a barrel, the lowest settlement since Dec. 16. Brent prices are down more than $15 a barrel so far in May, heading for the biggest monthly decline since October 2008, right after the collapse of Lehman Brothers.

U.S. July crude slumped $2.94 to $87.82 a barrel, the lowest settlement since Oct. 21, 2011. Front-month crude prices were headed for a loss of more than 17 percent for May, marking the biggest monthly drop since October 2008.

Wednesday's price slide took U.S. crude below the 61.8 percent Fibonacci retracement of the October to March rally at $88.55 a barrel, a key level of support for technical traders that can intensify selling by triggering stop losses.

U.S. RBOB gasoline and heating oil fell ahead of front-month June contract expirations o n T hursday, with gasoline, which had been trading around the 200-day moving average for the past eight sessions, breaking firmly below that level.

Little fundamental support for crude was seen coming from weekly U.S. inventory data from the American Petroleum Institute and the U.S. Energy Information Administration due out on Wednesday and Thursday, with analysts forecasting a 10th straight week of crude builds for the seven days to May 25.

Crude prices found some short-lived support intraday on news that the European Commission had called for the euro zone to move to a banking union and consider directly recapitalizing banks from its bailout fund.

The benchmark U.S. Treasury yield fell to its lowest in at least 60 years as worries of contagion from Spain's ailing banks raised bids for low-risk investments.

Data showing pending home sales in the United States fell in April to a four-month low, an unexpected slip that undermined any recent optimism about the housing sector, added to investor concerns.

CHINA

Hopes that No. 2 oil consumer China would act to counter slowing growth were dimmed after influential academics said Beijing should shun aggressive fiscal stimulus, in remarks published in leading state-backed newspapers on Wednesday.

Those views joined a chorus of commentary countering market expectations that China might unveil a stimulus package similar to the 4 trillion yuan ($630 billion) in spending unleashed during the global financial crisis.

IRAN'S NUCLEAR DISPUTE

The saga over Iran's nuclear program and the West's belief that it is not just for peaceful uses continued to lurk as a potentially supportive factor for oil prices, along with the 14-month-old uprising in Syria.

U.N. nuclear inspectors showed new satellite imagery indicating that Iran may be conducting clean-up work at the Parchin military site where inspectors suspect tests relevant to developing nuclear weapons have been carried out, according to Western diplomats.

Iranian President Mahmoud Ahmadinejad said he did not expect talks with six world powers in Moscow next month to yield any major breakthroughs.

Iran faces a European Union embargo on its crude oil in July and tightening U.S.-led sanctions have sent many of Tehran's other oil customers scrambling for alternatives. (Additional reporting by Matthew Robinson in New York,; Simon Falush in London and Luke Pachymuthu in Singapore; Editing by David Gregorio and Dale Hudson)

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