* Moody's downgrades credit rating of 16 Spanish banks
* Seaway pipeline reversal completed; oil to flow this
* Investors eye weekend G8 meeting, Iran nuclear talks next
(Adds fresh quotes, updates prices)
By Claire Milhench
LONDON, May 18 Oil prices slipped below $107 a
barrel on Friday and hit a 2012 low as investors fought shy of
riskier, growth-oriented assets on fears that Greece would leave
the euro, and after a downgrade of 16 Spanish banks by Moody's
added to the contagion gloom.
Brent crude was down 51 cents to $106.98 a barrel by
1122 GMT after earlier slipping to its lowest level for the year
at $106.40. U.S. crude was up 16 cents to $92.72.
"The driving factor is still what is going on in Europe with
the downgrades of the Spanish banks and very
negative sentiment towards risk investments," said Eugen
Weinberg, an analyst at Commerzbank in Frankfurt. "It's not
surprising to see further falls in Brent today."
The euro fell to fresh four-month lows as the dollar
strengthened, putting commodities priced in dollars under
Weinberg said that although the Spanish bank downgrades and
Greece's failure to find a consensus in the first election round
had been anticipated, the potential fall-out had not been fully
"Once it happens, the market understands how serious things
are. The risks are not yet completely reflected in the price."
The lack of a Greek government is raising fears about a
disorderly exit from the euro as without a government it cannot
implement austerity measures in exchange for rescue funds.
Michael Poulsen, an oil analyst at Global Risk Management
put the cost of such an exit at 5 percent of eurozone GDP, or
about $1 trillion.
Analysts were not optimistic about the prospects for
recovery in the event of a Greek exit. Michael McCarthy, a
markets strategist at CMC Global Markets in Sydney, said further
credit downgrades would weigh on demand projections and argued
there was potential for "structural destruction".
"It's the fear factor that's driving Brent," agreed Guy
Wolf, macro strategist at Marex Spectron in London. "Finally
Europe has reached the key Greece in/Greece out moment."
If Greece leaves, this could trigger bank runs in Italy and
Spain, he added, seeing the possibility of a major impact on
Analysts at Bank of America Merrill Lynch said the contagion
effect, whereby other countries have to leave as well, could
trigger a contraction of 10 percent in GDP and a 2 million
barrel-per-day fall in OECD European oil demand.
They see Brent prices falling as low as $60 a barrel in the
event of a broader eurozone break-up, but if the impact is
contained, Brent is seen slipping to $80 a barrel.
U.S. crude prices held up better than Brent, buoyed by
expectations that the Seaway pipeline reversal would ease an oil
glut at Cushing, Oklahoma, by pumping oil out to the refineries
on the U.S. Gulf.
The first crude oil was expected to flow on the reversed
Seaway pipeline this weekend, a historic move to ease a Mid-West
oil glut and bring depressed North American crude prices more
closely into line with world oil prices.
July Brent's premium to West Texas Intermediate (WTI)
CL-LCO1=R narrowed to $13.97. The premium had ended at $18.90
on Wednesday, when the Brent June contract expired.
Investors are now eyeing a G8 summit this weekend and
nuclear talks between world powers and OPEC-member Iran next
week for trading cues. Brent surged to above $128 a barrel in
March on supply concerns amid tightening Western sanctions on
Iran over its disputed nuclear programme.
The United States delayed a bill for new economic sanctions
on Iran's oil sector after Senate Republicans blocked the
legislation on Thursday saying they needed more time to study
the bill. The surprise move triggered anger from Democrats who
wanted approval ahead of the nuclear talks.
On the agenda at the G8 summit will be pressures on global
oil markets, a top White House official said on Thursday, who
declined to specify whether a release of strategic reserves
would be discussed. Analysts are sceptical how
much this would achieve, in any case.
"It can impact sentiment temporarily but given the size of
the strategic reserve releases relative to aggregate oil demand,
I'm not of the view that it matters in any sustainable way,
although it can have a short-term effect on prices and cause
traders to run for cover," said Marex Spectron's Wolf.
(Additional reporting by Florence Tan in Singapore, Editing by