Oil reverses gain, falls below US$61 as other commodities weigh

[LONDON] Oil slipped below US$61 a barrel on Tuesday, dragged lower by weakness in some other commodity markets, although threats to Middle East crude supplies and expectations lower prices may prompt a slowdown in US output limited the fall.

Silver fell by up to 5 per cent and gold snapped a three-day rally. Investors in those commodities remained cautious after a breakdown of debt talks between Greece and euro zone finance ministers. "I think it all started in silver with squeezing out of long positions, then spilled over to gold and then to oil," said Carsten Fritsch, commodities analyst at Commerzbank.

Brent crude fell 67 cents to US$60.73 a barrel by 1504 GMT. It reached a 2015 high of US$62.57 on Monday. US crude dropped US$1.39 to $51.39 a barrel.

Lending support to oil earlier, Egypt on Monday bombed Islamic State targets in Libya, where violence has reined in most oil output. Iraq's semi-autonomous Kurdistan Regional Government threatened to withhold oil exports if Baghdad failed to send its share of the budget.

Oil prices collapsed in the second half of 2014 on oversupply. The Organization of the Petroleum Exporting Countries refused to cut its output, choosing to defend market share against US shale oil and other competing sources.

Brent has still jumped by about 35 per cent in the last four weeks, supported by a sharp fall in US oil drilling. It had reached US$45.19 on Jan 13, the lowest in almost six years, down from US$115 in June.

The threat to Iraq's northern exports from the revenue dispute arises as bad weather has cut Iraq's southern shipments this month.

With risks to Middle East supply back on the market's radar, International Energy Agency Chief Economist Fatih Birol warned the rise of Islamic State presented a major challenge for the investment necessary to prevent an oil shortage in the next decade.

Even so, some analysts see the rally as overblown because the market remains oversupplied. Crude inventories in top consumer the United States have hit record highs for the last five weeks. "US refinery outages, through seasonal maintenance and industrial action, will weaken US crude demand, exacerbating the crude stock excess in the near term," BNP Paribas analysts Gareth Lewis-Davies and Harry Tchilinguirian said in a report.

REUTERS