Oil tumbled in a second day of heavy losses on Monday, with Brent crude reaching its lowest price in almost a month as escalating fears over the euro zone debt crisis triggered across-the-board selling of riskier assets. After notching its biggest two-day drop since a steep slide in early August, Brent pared losses in post-settlement trade on news that Greece may be near an agreement with lenders to continue receiving bailout funds. Still, the growing possibility of a default hung heavy over markets all day after leaders failed to find new ways to resolve the crisis at the weekend.
Oil has weathered much of the turmoil in financial markets over the past month thanks to supportive fundamentals, such as diminished North Sea production and healthy Chinese demand. After falling below $100 in August, Brent has traded in a band of around $105 to $115 a barrel for the past month.
On Monday it appeared to be succumbing to broader macro-economic fears, causing a renewed spike in options. Technical selling as Brent crude crashed below the 200-day moving average likely spurred selling too.
"Markets are under pressure as the European finance ministers failed to come up with anything solid this weekend. There are some strong worries that Greece is not doing what's needed to get another round of aid," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.
Trading volume was anemic at more than a quarter below the one-month average as investors kept their powder dry ahead of a host of major events this week, including the U.S. Federal Reserve's likely measure later this week to temper long-term interest rates, the International Monetary Fund's gathering of major financial ministers and a slew of U.S. housing data.
ICE Brent November crude fell $3.08 to settle at $109.14 a barrel, having fallen as low as $108.87, its lowest price since August 24. It has closed below the 200-day moving average, effective at $110.41 on Monday, only about four times in the past year, all of them in August.
U.S. October crude, approaching expiration on Tuesday, dropped $2.26 to $85.70 a barrel. The front-month Brent/WTI spread narrowed by 70 cents to $23.34 a barrel.
Oil slid with stock markets, copper and the euro, while the dollar index .DXY and Treasuries rose as investors sought safer havens. The S&P <500 index .SPX fell 1 percent, with the financial and energy sectors leading losses. Stocks pulled back from earlier losses as deep as 2 percent. .N
Implied oil market volatility, as measured by the Chicago Board Options Exchange's Oil Volatility Index .OVX, jumped more than 11 percent to 46.56 percent, the biggest one-day gain in a month and reversing a five-day easing period.
Total NYMEX crude trade came to about 545,000 contracts, the lowest daily total since August. Brent trade of some 365,000 lots was nearly its slowest since July.
FED FOCUS AFTER EURO FAILURE
The euro fell after a weekend meeting of European Union finance ministers in Poland did not produce an agreement on new ways to tackle the region's debt crisis.
Markets were also upset by signs of mounting political strife. Greek Prime Minister George Papandreou canceled a visit to the United States to chair a cabinet meeting on Sunday, while German Chancellor Angela Merkel on Sunday notched up her sixth election defeat this year in a regional vote.
A Monday conference call between Greece and its international lenders, also known as the "troika", appeared to produce some cause for relief, although officials said details of a deal would need to be worked out on Tuesday.
Investors will now turn to Washington for fresh ideas on ending the cycle of gloom. The Federal Reserve's two-day rate meeting concludes on Wednesday with traders expecting an "Operation Twist" to begin shifting the composition of its balance sheet to weight it more heavily with longer-term securities as its part of its effort to reignite growth.
Traders will look to a G20 gathering on Thursday and Friday for indications about steps governments and policymakers may take to restore investor confidence.
In the meantime, traders will look to weekly inventory data on Tuesday afternoon and Wednesday morning for further evidence of a market that many believe belies the darkening outlook.
"While oil market fundamentals remain tight, oil prices will not fall, no matter how dire the global economic outlook. Without more supply, only another demand collapse will bring prices down," the UK-based Center for Global Energy Studies (CGES) wrote in its latest report.
OPEC promised to prevent markets from becoming oversupplied. Secretary General Abdullah al-Badri said in Dubai that producers would raise output as Libya gradually resumes production following its six-month civil war.