London: Oil edged down toward $99 as uncertainty over a Greek debt deal offset concerns that Iran could block shipments of crude in the wake of the European Union's decision to embargo imports of Iranian oil.
Negotiations to have Greece's private creditors swap their bonds for new ones of a lower value are crucial to avoiding a default and contain the European debt crisis. But Eurozone governments have taken a hard line on the rates the new bonds should pay, insisting they should be below 3.5 per cent, less than the creditors are so far willing to accept.
That has raised the prospect that the deal might fail, increasing uncertainty over Greece's future and hurting stock and commodity markets yesterday.
Benchmark oil for March delivery was down 38 cents at $99.20 a barrel by late morning in Europe in electronic trading on the New York Mercantile Exchange. The contract rose $1.25 to settle at $99.58 a barrel in New York on Monday.
Front-month Brent crude slipped 68 cents to $109.90 per barrel by 1105 GMT. US crude was down about 58 cents at $99.00.
Tobias Merath, head of global commodity research at Credit Suisse, said the fact US crude futures did not break up through $100 per barrel on Monday despite the EU embargo suggested the market was beginning to discount issues surrounding Iran.
The concerns over Greece offset worries about supplies out of the Arabian Gulf. Iran has said it could close the strategic Strait of Hormuz, through which a fifth of the world's crude is transported, in response to sanctions by the West.
On Monday, the EU said its refineries would stop buying Iranian crude after July. It also froze assets of Iran's central bank. The sanctions are meant to force Iran to talk with the West about its nuclear programme. Iran says its nuclear programme is peaceful, but Western nations suspect it is trying to build nuclear weapons.
The embargo itself isn't expected to affect world supplies, although markets would get reshuffled. Analysts say China, which is one of the biggest buyers of Iranian crude, probably will buy more Iranian oil at below-market prices when the embargo begins. China would reduce imports from other oil-producing countries, which would then sell more to Europe. "Iran needs to sell its oil to someone," independent analyst and trader Stephen Schork said. "Outside the West, Iran really has only one buyer: China. That means China's probably going to get some sweetheart deals."
Experts say Iran doesn't have the firepower to close off the strait, which is the only way to get from the Arabian Gulf to the open sea. But a conflict there could clog the waterway with military vessels and force the world's refineries to wait for crucial oil shipments.
Data for the week ending January 20 is expected to show US stockpiles of 700,000 barrels in crude oil stocks and 2.2 million barrels in gasoline stocks, according to a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos.
In other energy trading, heating oil rose 0.3 cents to $3.01 a gallon and gasoline futures fell 0.9 cents to $2.77 a gallon.
Natural gas futures were up 8.8 cents at $2.61 per 1,000 cubic feet.
"Iranian military action or domestic unrest could both disrupt global crude oil flows," Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant, said in an email. "As such, this means that there are rising additional upside risks to crude oil."
Iran will sell its crude to non-Europeans if the European Union makes good on its decision to stop buying its oil, Fars reported, citing Mohammad Kowsari, deputy head of the parliament's National Security and Foreign Policy commission.
"In the long term, the Chinese and Indians are going to continue to purchase oil from Iran, so the embargo is more of a reshuffle of the cards," said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. The EU bought 450,000 barrels a day of Iran's oil in the first half of 2011, or 18 per cent of its total exports, US Energy Department data show. China accounted for 22 per cent, Japan 14 per cent and India 13 per cent, the department said.