Brent slips towards $111 on euro zone worries

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SINGAPORE (Reuters) - Brent crude slipped towards $111 on Monday, continuing to drop for a third straight session, after talks to form a new government in Greece failed, deepening the euro zone crisis and cutting fuel demand further.

Investors were cautious as a repeat Greek election will be needed if politicians cannot reach a compromise, pushing the debt-laden country closer to bankruptcy and likely driving oil prices southwards.

Brent crude had fallen 46 cents to $111.80 a barrel by 23:00 EDT (0300 GMT) after settling at $112.26 on Friday, its second straight weekly loss.

U.S. crude dropped 74 cents to $95.39, after earlier declining to a low of $95.17.

"The path of least resistance for oil is down, on sentiment on the euro zone and weak data from China on Friday," said Ben Le Brun, market analyst at OptionsXpress in Sydney.

"Traders are focusing on the negative and if something happens in Europe this week, oil prices will be further pushed down."

The fall in oil prices was tempered, however, by Sunday's move by China's central bank to cut the amount of cash banks must hold as reserves, freeing an estimated 400 billion yuan ($63.5 billion) for lending and offering a cushion for a slowing economy.

The step came after industrial output data on Friday for the world's second largest oil consuming country showed the economy weakening from its slowest quarter of growth in three years.

Industrial production weakened sharply in April and fixed asset investment - a key growth driver - hit its lowest level in nearly a decade, surprising many economists who thought Q1's 8.1 percent annual rate of growth marked the bottom of a downswing and were expecting signs of recovery in Q2 data.

Causing further turmoil in the euro zone, German chancellor Angela Merkel's conservatives suffered a crushing defeat on Sunday in an election in the country's most populous state, a result which could embolden the left opposition to step up attacks on her European austerity policies.

IRAN RISK PREMIUM

Adding to the geopolitical risk premium, Iran warned Western powers on Sunday that applying pressure on Tehran could jeopardise talks on its nuclear program, state television reported.

Iran's dispute about its nuclear program with the West and an European Union embargo on Tehran's oil set for July sent prices soaring in the first quarter.

The West suspects Iran is seeking to develop nuclear weapons. Tehran says its program is purely for peaceful purposes such as power generation.

Tensions between Iran and the west is likely to keep oil prices high despite a dramatic improvement in world supply and a big build in stocks, the International Energy Agency said on Friday.

Top crude exporter Saudi Arabia wants an oil price of around $100 a barrel and would like to see global inventories rise before demand picks up in the second half of the year, Oil Minister Ali al-Naimi said.

The kingdom is working at bringing Brent crude prices to that level, he added. The country, OPEC's biggest producer, said it pumped 10.1 million bpd in April, its highest for more than 30 years, as it bid to meet growing demand and curb oil prices.

(Editing by Joseph Radford)

Euro Zone