Oil falls a second day in volatile expiry trade

Excess oil is burnt off at the Mobil oil refinery at Altona in Melbourne June 27, 2008.

New York - Oil fell a second straight day on Thursday in light volume trading, giving up early gains as investors remained cautious about prospects for economic growth in Europe and China.

Expiring front-month January Brent was the only oil contract to buck the downtrend, managing a 7-cent gain as it went off the board, with U.S. January crude options expiration adding to the volatility.

"Brent is going into the expiry so we've got a bit of cover on that but the rest of the (crude) complex is taking it on the chin with all commodities," said Richard Ilczyszyn, chief market strategist and founder of iitrader.com in Chicago.

"I think this is an end-of-the-year trade as well, if you caught September moves into November and December, if you are a fund manager, you are going to try to end the year on an up note."

Front-month U.S. crude slumped in September and hit a 2011-low of $74.95 on October 4, then rallied to $103.37 intraday on November 17.

On Thursday, persistent trepidation about Europe's debt crisis and signs of slowed growth in No. 2 oil consumer China countered supportive U.S. jobs and manufacturing data.

Expiring ICE front-month January Brent crude edged up 7 cents to settle at $105.09 a barrel, well off its $106.50 intraday peak. On Wednesday Brent slumped more than 4 percent, posting the biggest one-day percentage loss since September 22 and breaking below its 300-day moving average of $107.08.

February Brent crude fell 65 cents to settle at $103.60 a barrel, and fell as low as $103.02.

U.S. January crude fell $1.08 to settle at $93.87, after reaching a $95.99 session high. It fell to $93.31 in post-settlement trading, stalling its slide just above the $93.16 300-day moving average for front-month crude.

That added to losses of more than $5 on Wednesday, off more than 5 percent, and also the biggest one-day percentage loss since September 22 and pushing below the 200-day moving average of $95.98.

Brent's premium against U.S. crude widened to $11.83 intraday on Thursday, highest in two weeks, after closing at $10.07 on Wednesday.

Crude trading volumes remained below average, with Brent 39 percent below and U.S. volume 17 percent under 30-day averages.

"Continuing worries about the euro zone debt crisis are keeping gains limited today, despite the positive U.S. data on jobless claims and New York manufacturing activity. Investors are reassessing the market after yesterday's sharp drop," said Chris Dillman, an analyst at Tradition Energy in Stamford, Connecticut.

U.S. DATA, CHINA FACTORY ACTIVITY

U.S. economic data showed jobless benefit claims fell unexpectedly to a 3-1/2 year low last week while growth of regional business in the New York and mid-Atlantic region were stronger this month.

While the reports suggested gradual improvement in the still-weak economy, the impact on commodities and equities prices was limited as U.S. industrial production fell in November for the first time since April.

In a fresh sign China's economic growth could be slowing, data showed the first year-on-year drop in foreign direct investment in 28 months. There was also a fresh fall in new orders, signaling more contraction in factory activity.

Factory output in China, the No. 2 oil consumer, shrank again in December, a preliminary purchasing managers' survey showed, reinforcing concerns that manufacturers face waning global demand and tight domestic credit.

MIDDLE EAST FACTORS

Tensions spawned by Iran's nuclear program remained supportive to oil, fueling fears that more sanctions against Tehran could spark supply disruptions.

Turkey's Halkbank refused to open an account for India's BPCL to settle payments for oil imports from Iran, a sign that Tehran may struggle to redirect European volumes to buyers in Asia.

The Organization of Petroleum Exporting Countries on Wednesday agreed to an output target of 30 million barrels per day, ratifying current production near 3-year highs. The deal settled a six-month-old argument over supply policy firmly in Saudi Arabia's favor.

But OPEC's agreement has no mechanism to cut quotas should already-fragile demand grow less quickly than expected.

(Additional reporting by Matthew Robinson in New York; Jessica Donati in London; Editing by Marguerita Choy, Andrea Evans and David Gregorio)