Oil declined in London, reversing earlier gains, after the downgrade of Portugal’s credit rating by Moody’s Investors Service sowed concern that Europe’s debt crisis will hurt fuel demand. Brent crude fell as much 0.9 percent, capping yesterday’s 2 percent rally, as the euro weakened against the dollar after Moody’s cut Portugal’s rating to junk status. Futures earlier added as much as 0.6 percent before a U.S. Energy Department report tomorrow that may show crude stockpiles dropped, the longest decline since January. The industry-funded American Petroleum Institute will report its own data today. “Right now the market’s reacting to rising concerns about Portugal’s credit rating, risk aversion and the strengthening dollar,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt. Brent crude for August settlement on London’s ICE Futures Europe exchange dropped as much as $1.01 to $112.60 a barrel and traded at $112.80 at 9:20 a.m. local time. The European benchmark contract was at a premium of $16.18 to U.S. futures. The spread reached a record $22.29 on June 15. Crude for August delivery on the New York Mercantile Exchange was down 27 cents at $96.62 a barrel after rising to $97.79. Yesterday, the contract advanced $1.95 to $96.89, the highest settlement since June 14. Portuguese Rating Moody’s late yesterday slashed Portugal four levels to Ba2 from Baa1 with a negative outlook. The decision came two months after Portugal got a 78 billion-aid package ($112 billion) and hours before today’s sale of 1 billion euros of treasury bills. The euro weakened against all but two of 16 major peers tracked by Bloomberg. U.S. crude inventories shrank 2.5 million barrels from 359.5 million in the week ended July 1, according to the median estimate of 11 analysts surveyed by Bloomberg News. All respondents expect a drop. “Inventories drawing, the summer drive-time and the hurricane season all provide that flavor for a market that wants to continue higher,” said Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney, who predicts oil in New York will average $100 a barrel this year. “I’d expect more gains to be had in the oil market.” Gasoline stockpiles probably increased 1 million barrels from 213.2 million, based on the survey. Supplies are down for two weeks as imports declined. Oil rose yesterday after a Commerce Department report showed orders placed with U.S. factories increased 0.8 percent in May, below a median economist forecast of 1 percent. The Institute for Supply Management’s index of service industries, due for release tomorrow, may decrease. ‘Designer Dresses’ “There was a good deal of ‘fact-fitting’ with traders talking about vague optimism for the second half,” Peter Beutel, president of Cameron Hanover Inc., an energy adviser in New Canaan, Connecticut, said in a note. “Nothing really fit well for us and the reasons used to describe the advance of the last few days have hung like designer dresses on homeless models. They just don’t look right.” Oil’s rally in New York may stall around $98 a barrel as prices approach technical resistance, according to data compiled by Bloomberg. Front-month futures are below the 61.8 percent one-year Fibonacci retracement on the daily chart. A failure to breach resistance usually means prices will change direction. Barclays Plc yesterday increased its 2012 forecasts for Brent and U.S. benchmark West Texas Intermediate crude prices. Brent will average $115 a barrel next year, up $10 from the previous estimate March 24, Barclays analysts led by Paul Horsnell in London said in a report. The bank increased its 2012 outlook for U.S. futures by $4 to $110 and cut its 2011 prediction by $6 to $100. To contact the reporters on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.net Grant Smith in London at gsmith52@bloomberg.net To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net

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