06/11/2012 09:17 EDT | Updated 08/11/2012 05:12 EDT

Oil prices fall as Spain's bailout pact fails to ease global economic worries

Oil fell Monday on the realization that a short-term fix for Spain's ailing banking industry won't offer a long-term solution to Europe's debt crisis.

A multibillion-dollar bailout loan for Spain's banks generated initial enthusiasm in the global stock, bond and energy markets. But by the close in New York, the good feeling had given way to skepticism.

Benchmark West Texas Intermediate crude fell $1.40 to US$82.70 a barrel in New York. Brent crude, which is used to price international varieties of oil, dropped $1.47 to $98 per barrel in London.

Leaders of European countries agreed on the weekend to lend Spain up to US$125 billion to help its troubled banking system. Spain is the fourth European country after Greece, Portugal and Ireland to request financial help since the debt crisis began.

Oil jumped above $86 per barrel in trading in Asia. But the relief was temporary, replaced by concern over Spain's ability to repay the money.

As well, the potential for Greece to abandon the European current still hangs over the market, as does a deepening recession in Italy. That turmoil, along with slowing economic growth in China and the U.S., is reducing demand for oil, gasoline and diesel fuel.

It was not yet clear whether Europe's ongoing efforts to put the financial crisis to rest will result in an economic turnaround.

"It just doesn't seem like that's very close," said Michael Lynch, president of Strategic Energy & Economic Research.

Meanwhile, oil supplies continue to build despite ongoing weak demand around the world.

U.S. oil production topped six million barrels a day in the first quarter of 2012, which was a 14-year high, according to the Energy Information Administration. Most of the increase was the result of more production in North Dakota, Texas and the Gulf of Mexico.

Oil's decline was tempered by date showing China imported nearly six million barrels of crude a day in May. That was about 10 per cent more than April and 18 per cent more than a year earlier. China is a huge importer of oil and other commodities.

Natural gas dropped 8.1 cents to US$2.218 per 1,000 cubic feet. The price has plunged about 50 cents in three weeks as supplies remain well above normal levels.

In other trading, heating oil fell 3.64 cents to US$2.638 a U.S. gallon (3.79 litres) and gasoline dropped 2.86 cent to US$2.657 a gallon.



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