Oil falls as euro zone woes pressure commodities

Oil prices fell 2% on Monday as concerns about the euro zone sovereign debt crisis sent investors out of commodities and into safer havens.

The Reuters-Jefferies CRB index, a global benchmark for commodities, lost 1 percent and equities dropped as the dollar surged to a two-month high against the euro. Traders were weighing heightened risks in Spain and Greece and fresh concerns about Italy.

"The euro zone appears to have triggered this morning's sell-off," Jim Ritterbusch, president at Ritterbusch & Associates in Galena, Illinois, said in a research note.

"Dollar strength against most currencies is driving a renewed 'risk-off' response."

Early pressure on oil prices came from data showing China's factories expanded at their slowest pace in 10 months, adding to evidence that the economy is moderating as a tighter monetary policy starts to bite.

Brent crude for July delivery fell USD 2.29 to settle at USD 110.10 a barrel, ending below the 100-day moving average and falling intraday as low as USD 108.58.

U.S. July crude dropped USD 2.40 to settle at USD 97.70 a barrel, finishing below the 100-day moving average and having fallen to a low of USD 96.37. Investors eyed support above the USD 94.63 low for May and the 200-day moving average of USD 90.05.

U.S. crude trading volumes remained light, 36% below the 30-day moving average in post-settlement trading. Brent volumes trailed the 30-day average by 25%.

Recent tepid trading volumes have helped cause price swings, especially intraday volatility, analysts and traders said. The Chicago Board Options Exchange's oil volatility index rose 3.8% on Monday to 38.61%, reaching

40.66 intraday, still well below the 48.64 peak from May 5.

U.S. front-month June gasoline futures bucked the trend and settled 0.23 cent higher at USD 2.9381 a gallon, lifted by the shutdown of a gasoline-making unit at a Canadian refinery and an emissions-related upset at Exxon's Joliet, Illinois refinery.

U.S. June heating oil , the distillate benchmark, tumbled more than 7 cents as the June contracts continue to trade until May 31.

Euro Zone Worries

Investors sought safer havens after a weekend wipe-out of Spain's ruling Socialists in regional and municipal elections raised fears of potential clashes over deficit curbs between central and local government as Madrid fights to avoid a bailout.

Added concerns came after Italy, which has the euro zone's biggest debt pile in absolute terms, was hit by a decision by credit ratings agency Standard & Poor's on Saturday to cut its outlook to "negative" from "stable".

Fitch Ratings cut Greece's debt rating on Friday.

Crude oil stocks seen lower

A drop in imports and increased refinery use are expected to have pushed US crude oil inventories lower last week, according to a Reuters survey of analysts on Monday.

Gasoline and distillate stockpiles were estimated to be up slightly, by half a million barrels, the survey showed.