Oil drops for third straight session on weak European economic data

By Shariq Khan

BENGALURU (Reuters) -Oil prices fell on Tuesday for the third straight session after a flurry of slow economic data from Germany, the euro zone and Britain weighed on the outlook for energy demand.

Brent crude futures fell $1.76, or 2%, to settle at $88.07 a barrel, while U.S. West Texas Intermediate crude futures fell $1.75, or 2.1%, to close at $83.74 a barrel.

Euro zone business activity data took a surprise downward turn this month, suggesting the bloc may slip into recession.

German readings suggested a recession in that country is underway. Britain's businesses reported another monthly decline in activity, highlighting recession risks ahead of the Bank of England's interest rate decision next week.

"There is definitely a dialogue on about the global economy being worse this week than it was last week," said Mizuho analyst Robert Yawger.

"It does not help that a lot of the top bankers and financial experts are in Saudi Arabia today talking about how bad the economy is," Yawger added, referring to the Future Investment Initiative event dubbed "Davos in the Desert."

In contrast to Europe, U.S. data showed business output ticked higher in October as manufacturing pulled out of a five-month contraction. The relative strength of the U.S. economy helped lift the dollar, making dollar-denominated oil more expensive for holders of other currencies.

"As much as this market has been worried about the war in the Middle East and efforts from Saudi Arabia to tighten supply, demand has been a major headwind for a while now," said John Kilduff, partner at New York-based Again Capital.

However, the American Petroleum Institute's weekly storage report showed large declines in crude oil and fuel inventories last week, indicating strong demand in the country. [API/S]

A preliminary Reuters poll on Monday showed analysts expected an increase in crude oil stocks. Official storage figures from the U.S. Energy Information Administration are due on Wednesday morning at 10:30 a.m. EDT (1430 GMT).

Both benchmarks briefly recovered some losses in low volume, post-settlement trading after the report but were still down around 2% by 4:50 p.m. EDT.

Meanwhile, the release of hostages from Gaza and intensifying diplomatic efforts to contain the conflict between Israel and Hamas have also taken out the risk premium that helped push Brent prices to their highest in a month on Friday, Kilduff and Yawger said.

Also on Tuesday, the International Energy Agency said it expects fossil fuel demand to peak by 2030 based on governments' current policies.

(Reporting by Shariq Khan; Additional reporting by Sadia Nasralla, Mohi Narayan and Yuka Obayashi; Editing by Mark Potter, Will Dunham, David Gregorio and Jonathan Oatis)