* Moody’s downgrades credit rating of 16 Spanish banks
* Seaway pipeline reversal completed; oil to flow this weekend
* Investors eye weekend G8 meeting, Iran nuclear talks next week (Adds fresh quotes, updates prices)
By Claire Milhench
LONDON, May 18 (Reuters) - 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 more pressure.
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 priced in.
“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 growth.
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 Alison Birrane)