Oil declined for the first time in five days on concern a failure to reach a deal on raising the U.S. debt limit may cause the nation to default, threatening the economy of the world’s biggest crude consumer. Futures slipped as much as 1.1 percent after House Speaker John Boehner told Republicans that there’s no agreement on a plan for increasing the ceiling before a default threatened for Aug. 2. Standard & Poor’s has warned there is a 50 percent chance it will lower the U.S. government’s AAA credit rating by one or more levels within three months. European leaders announced a new rescue package for Greece last week as they sought to halt the spread of the region’s sovereign debt crisis. “It weighs on sentiment about demand prospects in the U.S. and adds to the uncertainty of what is an uncertain time at the moment,” said Ben Westmore, a minerals and energy economist at National Australia Bank Ltd. in Melbourne, who predicts oil will average $113 a barrel in the third quarter. “The longer-term structural problems in Europe still remain and it’s likely to continue to be a risk for global growth for some time.” Crude for September delivery fell as much as $1.13 to $98.74 a barrel in electronic trading on the New York Mercantile Exchange and was at $98.83 at 1:35 p.m. Sydney time. The contract advanced 2.7 percent last week, its fourth weekly gain. Prices are 25 percent higher the past year. Brent oil for September settlement dropped as much as 88 cents, or 0.7 percent, to $117.79 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract traded at a premium of $19.13 a barrel to U.S. futures, compared with a record close of $22.63 on July 14. Financial Investors Republicans prepared to force action on a shorter-term extension of the limit than President Barack Obama has requested, defying a veto threat. Obama would veto a measure that doesn’t extend the limit into 2013, White House Chief of Staff Bill Daley said in an interview on NBC’s “Meet the Press” yesterday. “For the financial investors, if the debt issue is not really resolved, they may cut a portion of their risky assets,” said Tetsu Emori, a commodity fund manager at Astmax Co. in Tokyo. “Crude oil is a kind of risky asset, so people may cut a part of their portfolio.” Hedge funds raised net-long positions in crude oil by 8 percent to 182,285 in the week ended July 19, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. Market Warning Daley warned “markets around the world” would react negatively to a short-term measure offering less than $2.4 trillion in borrowing authority. A Republican congressional official said Boehner, speaking by telephone to lawmakers, is reporting that discussions are continuing. Even if Congress raises the limit in time to avert a default, Standard & Poor’s might lower the U.S. AAA sovereign credit rating to AA+ with a negative outlook if a deal isn’t accompanied by a “credible solution” on the debt burden, it said in a report July 21. “In the event of a U.S. default, the dollar should weaken further and as a consequence oil prices should rally, at least until a commonly agreed solution to the U.S. situation is reached,” said John Sfakianakis, chief economist at Riyadh- based Banque Saudi Fransi. “As of yet, oil prices have not yet priced in a U.S. default outcome fully.” The dollar slipped 0.8 percent versus the Swiss franc, 0.2 percent against the yen and 0.1 percent versus the euro. S&P 500 futures expiring in September declined 0.9 percent to 1,328.30, and the MSCI Asia Pacific Index of shares in the region slipped 0.7 percent. European Debt Any debt-limit increase must pass both the Republican- controlled House and the Democratic-run Senate and be signed by Obama. Democrats have resisted cuts to entitlement programs such as Social Security and Medicare and called for higher taxes, while Republicans have insisted a debt ceiling be accompanied by corresponding spending cuts and no tax increases. “Politicians in Washington will try their best to avert the U.S.’s first default in history,” said Ehsan Ul-Haq, a senior market analyst with KBC Energy Economics in Walton-on- Thames, England. “But if they fail to agree, markets will most probably react negatively. However, the reaction is not likely to be as severe as in the case of fears of Greek debt contagion spreading to other European countries.” Crude prices dropped 11 percent in the second quarter amid concern Europe’s crisis threatened to derail the economy and temper oil demand. European leaders announced 159 billion euros ($229 billion) in new aid for Greece on July 21. They also empowered their 440 billion-euro rescue fund to buy debt across stressed euro nations. To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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