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Oil slips as dollar rises on Korea, euro crisis

LONDON - Oil fell towards $81 on Tuesday as the dollar gained after an exchange of artillery fire on the Korean peninsula and as the euro fell on fears Ireland’s debt crisis might lead to problems elsewhere in Europe.

North Korea fired dozens of artillery shells at a South Korean island, setting buildings on fire and provoking a return of fire by the South, Seoul’s military and media reports said.

European stock markets, which financial bookmakers had been calling flat before the Korean news, opened lower and remained down, while U.S. 10-year Treasury futures rose and the Japanese yen fell.

U.S. crude for January shed 26 cents to $81.48 a barrel by 1017 GMT, after having dropped 71 cents on Monday. ICE Brent was down 20 cents to $83.76 a barrel.

Oil and commodities often move inversely to the dollar, partly because many of them are priced in the U.S. currency.

The euro came under further pressure as political uncertainty in Ireland and worries about other heavily indebted members of the 16-nation bloc snuffed out optimism over a bailout plan for Dublin.

Analysts said the Korean shelling and Irish meltdown had come at a time when risk aversion could be expected to rise anyway ahead of the Thanksgiving weekend in the United States.

“Reduction of risk”

“We are in front of a very long weekend,” Olivier Jakob at Petromatrix said. “Long weekends usually lead to short-covering, but the recent political uncertainties in Ireland and the military escalation between North and South Korea would plead for reduction of risk in front of the holidays.”

“Given that the main area of growth is out of emerging Asia, the escalation of tensions between North and South Korea is not a positive development for oil markets,” Jakob added.

Mark Pervan, an analyst at ANZ in Melbourne, said the Korean artillery exchange was “a trigger for the ‘risk off’ button”:

“You’ll certainly see selling in risk-based markets like equities and commodities until we get a better read on events.”

Irish Prime Minister Brian Cowen defied pressure to quit on Monday, saying he would stay in office until parliament passed an austerity budget needed to secure the IMF/EU bailout, which could total 80 billion to 90 billion euros, and then call an early election.

Expectations of a drawdown in U.S. crude stocks, reflecting demand in the world’s top energy consumer, could support prices.

Industry data from the United States due at 2130 GMT is expected to show a third week of decline for crude inventories following a surprise heavy drawdown in the previous week, a Reuters poll showed on Monday.

Traders were also watching the impact of a disruption to some of Shell’s crude oil production in Nigeria.

Nigerian output of Bonny Light crude has fallen by about 100,000 barrels per day (bpd) to between 210,000 and 220,000 bpd after a damaged pipeline led Shell to declare a force majeure on exports on Friday.

The market is also keeping an eye on the political situation in Saudi Arabia as the country’s ageing King Abdullah arrived in the United States for medical treatment on Monday, while a frail Crown Prince Sultan hurriedly returned from abroad to govern the world’s largest oil exporter.