Oil falls on weak euro zone data, recession worry

NEW YORK (Reuters) - Oil prices fell on Monday as contracting industrial output in the euro zone highlighted the danger of recession in the region as Europe struggles to contain its sovereign debt crisis.

Industrial production in the 17-country bloc fell 2.0 percent in September from August, dimming support for oil from investors who had hoped new governments in Italy and Greece would help their economies avoid a collapse.

The poor industrial data and Italy paying a euro-era high price to sell five-year bonds pressured the euro and equities.

"The markets are realizing there are real economic problems in Europe," said Christophe Barret, global oil analyst at French bank Credit Agricole.

ICE Brent December crude fell $2.27 to settle at $111.89 a barrel, back below its 200-day moving average of $113.03 and with the day's $111.32 low just under the $111.39 100-day moving average.

U.S. December crude fell 85 cents to settle at $98.14 a barrel, after closing at a 15-week high on Friday.

Brent's premium to U.S. crude narrowed to under $14 a barrel, continuing its retreat from a $19.91 intraday peak on Nov 8.

SHAKY CONTANGO

The spread between front-month U.S. December crude and the January contract slipped into contango -- where the front-month price is weaker than nearby months.

Crude had been in backwardation, considered a more bullish condition, where the front-month is more expensive than contracts further out.

"I think the backwardation we were in was a bit overdone, because the Cushing de-stocking hasn't been that dramatic," said Dominich Chirichella, senior partner at Energy Management Institute in New York.

The move into backwardation had been attributed at least partially to recent drops in U.S. crude stockpiles, especially at the Cushing, Oklahoma, delivery point for the U.S. light sweet crude contract.

But some brokers cited the proximity of U.S. December crude options expiration on Tuesday and the contract's Friday expiration as a factor in the switch back to contango.

"It was hardly backwardation with conviction, but with all news of increased oil output from North Dakota to Tripoli, it is not a surprise that there is pressure returning to the front of the curve," said John Kilduff, partner at Again Capital LLC in New York.

Trading volumes were tepid, with Brent 3.5 percent below its 30-day average and U.S. 5 percent below its 30-day average, with less than two hours of post-settlement trading left.

U.S. heating oil futures' losses were limited by support from expectations of approaching winter demand and exports, while gasoline futures tumbled on weak demand and expected imports.

Heating oil's premium to gasoline based on settlements rose to 62.69 cents, or $26.32 a barrel on Monday, from 56.78 cents, or $23.84 a barrel, on Friday.

Monday's crude oil price weakness follows a strong rally from early October. U.S. crude fell to a 2011 low of $74.95 on October 4 and Brent dipped below $100 per barrel on that day.

Sliding U.S. inventories have left crude oil, distillate and gasoline stockpiles all below year-ago levels and stockpiles were expected to have fallen again last week, a survey of Reuters analysts on Monday showed.

Weekly inventory snapshots will start with a report from the American Petroleum Institute on Tuesday afternoon.

Supportive to oil was news Japan's economy expanded 1.5 percent in the third quarter, a sign of recovery from the earthquake and tsunami disaster.

Japan's utilities burned 200,000 barrels per day (bpd) of additional crude oil and 136,000 bpd of low-sulfur fuel oil in October than a year earlier, compensating for lost nuclear power capacity after the March earthquake.

(Additional reporting by Gene Ramos in New York, Christopher Johnson and Angela Bulgari in London and Manash Goswami in Singapore; Editing by David Gregorio)