OREANDA-NEWS. September 08, 2010. Light, sweet crude pared earlier losses on Tuesday to settle at USD 74.09, down just 51 cents from Friday's close, having traded in an intraday range of USD 72.63-USD 74.63/bbl. Brent crude for October settlement gained 87 cents, or 1.1%, to USD 77.74. Brent’s premium to NYMEX crude widened to USD 3.65/bbl yesterday, the biggest gap since May 20.

US crude oil won back losses and Brent crude turned positive after a deadly explosion ripped through a Mexican oil refinery, raising concerns that Mexico, a top US crude supplier, would have to import more fuel. Product futures surged after news of an explosion at the Mexico’s Cadereyta plant (near the city of Monterrey), which produces 275,000 bpd. As a result, Mexico, which already relies on imports for more than 40% of domestic gasoline demand, could now be forced to boost fuel imports significantly. Before this news broke, NYMEX October crude was down nearly USD 2/bbl on the back of concerns over European banks.

Mexico's state oil company Pemex confirmed at least one person was killed in the blast, which it said occurred following a leak in a compressor at the diesel-making unit at the refinery that triggered a fire.

US and European stock markets fell on banking sector worries after the Wall Street Journal reported bank stress tests of major lenders in Europe understated their holdings in potentially risky government debt. This news sparked a flight from riskier assets like commodities that weighed on oil prices.

A gauge of the US job market declined in August, rekindling worries about the outlook for oil demand. The Conference Board, a private research group, said its Employment Trends Index fell to 96.7 in August from a revised 97.4 in July, signaling US employment growth may continue to slow in coming months.

Oil declined this morning amid speculation that Europe’s debt crisis may worsen as regulators met in Basel to finalize new global rules on capital requirements and after The Wall Street Journal reported that the region's recent stress tests underestimated some lenders' holdings of government debt. Germany's Die Zeit reported late Monday that banks could be required to hold a Tier-1 capital level of 9% under new rules dubbed Basel III, potentially rising to 12% in boom years in order to build reserves to pay for a downturn. Investors read this as a sign that this could hamper global growth and crimp fuel demand. Futures dropped after German factory orders unexpectedly shrank in July, causing the euro to lose 1.5% against the dollar yesterday. Germany’s banking association said September 6 that the nation’s banks will need to raise USD 135 bn due to new regulation.

US crude inventories probably decreased last week, we think, due to lower imports as refineries took precautionary measures ahead of stormy weather. The IEA report could show that crude oil inventories sank by 700,000 bbl. We also expect to see a 500,000 bbl build in distillates, which include heating oil and diesel fuel, and a 900,000 bbl decline in gasoline supplies. Overall, the report could be fairly bullish. That said, with US jobs still hurting and renewed banking concerns in Europe we could see oil lose a dollar or so in today’s trading session.