Brent crude oil fell below $114 per barrel on Monday after data showed euro zone industrial output was contracting, suggesting a possible regional recession as Europe struggled to contain its widening debt crisis.
Industrial production in the 17-country bloc fell 2.0% in September from August, the EU's statistics office said, overshadowing hopes of new governments in Italy and Greece preventing their economies from collapsing and avoiding a financial meltdown.
Economists said the figures suggested the euro zone was heading for at least one quarter of economic contraction and could see a full-blown recession unless industrial output recovered quickly.
Brent crude fell 80 cents at $113.36 per barrel by 1335 GMT. US crude traded 90 cents lower at $98.09, after touching $99.69, its highest since July. Christophe Barret, global oil analyst at French bank Credit Agricole, said the euro zone industrial output figures were a reminder of the harsh economic realities facing Europe.
"The markets are realising there are real economic problems in Europe," Barret said.
The euro zone data dampened markets that had started fairly upbeat with improving risk appetite following the installation of new administrations in Rome and Athens.
Stock markets were generally stable with several commodities firmer and credit spreads slightly tighter.
Technocrat leaders in Italy and Greece raced to form new governments on Monday in an attempt to retain the goodwill of financial markets after promising to reduce state debt and impose austerity measures.
"Markets are optimistic that the critical deadlock is over and that something will be done to solve the euro zone debt crisis," said Carsten Fritsch, commodities analyst at Commerzbank in Frankfurt. "In the short-term it is possible that the market will take another leg higher."
Oil prices have rallied strongly over the last month with the US benchmark rebounding from a 2011 low of $74.95 on Oct. 4. Brent dipped below $100 per barrel on that day.
On Friday, the US crude oil benchmark closed at a 15-week high, posting a sixth consecutive weekly gain, while Brent pushed higher for a third straight week.
The spread between Brent and US crude has narrowed to almost $15.00, from more than $28 in mid October, as output has improved in the North Sea and Libya. Reuters technical analyst Wang Tao said Brent is likely to fall in the short term, dropping to $111.30 per barrel, a low touched on Nov. 10, while US oil may either hover around strong resistance at $98.91 or retrace to $97.
Oil prices have performed more strongly than equities over the last two months, weakening a correlation that has been strong this year and suggesting market fundamentals are tight.
Harry Tchilinguirian, head of commodity market strategy at BNP Paribas, said the market was still struggling without significant quantities of Libyan oil and there were no signs that the Organization of the Petroleum Exporting Countries would increase output.
"Markets see we are approaching a cold winter and there isn't a sufficient increase in OPEC supplies to match that seasonal demand, hence we're dealing with a level of inventories that is too low for winter," Tchilinguirian said.
"There is still a gap in the market cause by Libya's reduced levels of exports, and ... OPEC hasn't indicated that it's ready to step in and cover up that gap," he said.
Gas oil (heating oil and diesel) prices were particularly strong with ICE gas oil futures trading above $1,000 per tonne for the first time since Aug. 1.
Also supportive was data from the world's third-largest economy, Japan, showing the fastest growth among industrialised nations in the third quarter. To feed that growth as nuclear power output fell, its utilities consumed more than 13 times the amount of crude oil burnt in the same month a year earlier.