Oil weakens on Spain concerns

LONDON (Reuters) - Oil prices fell below $97 on Friday, tracking declines in the euro and European shares spurred by Spain's worsening banking crisis and after hopes of fresh global monetary stimulus were undermined by the head of the U.S. central bank.

Following its downgrade by ratings agency Fitch on Thursday, Spain is expected to request European aid for its banks at the weekend becoming the fourth and biggest country to seek help since the euro zone debt crisis began, EU and German sources said.

"The major issue is Spain's downgrade yesterday and whether or not they will agree to a bailout at the weekend meeting or wait until Spain completes an audit of its banking system," said Thorbjoern Jensen, oil analyst at A/S Global Risk Management.

"Oil is falling with the greater risk of a country exit from the eurozone rather than for fundamentals."

Brent crude for July dropped $2.34 to $97.59 a barrel by 1256 GMT, after hitting a low of $97.19.

U.S. crude prices fell $2.45 to $82.37 a barrel, having touched a low of $82.00. Both contracts are down for a second day.

Brent is poised to remain mostly unchanged for the week, having posted losses for the past five weeks. U.S. crude is set to fall for a sixth week in a row.

Spain's Economy Ministry said on Friday that the first independent audit of its banking system, which will detail how much extra capital needs it requires, would be completed by June 21.

Troubles in the euro zone overshadowed tensions between the West and Iran, OPEC's second largest oil producer, which helped push Brent prices to a record high $128 a barrel in March.

German exports and imports fell sharply in April, in a sign that Europe's largest economy is beginning to feel the chill from the crisis.

Top European shares were down 0.6 percent around midday, the euro had retreated to below $1.25 after a two-week high on Thursday.

GLOBAL ECONOMY SLOWS

Federal Reserve Chairman Ben Bernanke's testimony to Congress offered little encouragement to investors hoping the Fed would launch a third round of bond buying, or quantitative easing.

The latest set of U.S. international trade data is also adding to bearish sentiment, in a sign the global economy is slowing.

The U.S. trade deficit narrowed in April, as both imports and exports fell from record high levels set in March, a government report showed on Friday.

The Fed comments offset early support from a surprise interest rate cut by the world's second largest economy, China.

But cheers over the decision were short-lived as investors and economists worried that the move signalled the impending release of grim economic data over the weekend.

Concerns over the impact of lost Iranian crude exports once the July 1 embargo comes into effect are also easing.

Oil officials and executives, including the heads of Total, Royal Dutch Shell and Algeria's oil minister, said this week that the global oil market is well supplied and can cope with the loss of Iranian crude.

Furthermore, the United States is expected to announce a new list of countries that will receive exemptions to financial sanctions on oil trade with Iran.

"The fact oil is falling more than other commodities is because the market is well supplied and the EIA numbers yesterday showed a smaller stock draw," said Carsten Fritsch, analyst at Commerzbank.

Weekly data from the U.S. Energy Information Administration (EIA) on Thursday showed domestic stocks of crude were lower than forecast in a Reuters poll.

(Editing by Anthony Barker and Jason Neely)