(Reuters) - Oil futures hovered near $117.70 a barrel, shedding around $1 after a breakdown in Congress talks over the weekend helped drive investors away from volatile and risky assets on Monday.
Worries about a U.S. credit rating downgrade or even default clouded optimism about economic growth after a preliminary solution to the euro zone debt crisis helped propel Brent above $118 a barrel ahead of the weekend.
"After all the excitement on the economic front last week, attention will return to the fundamentals, particularly U.S. weekly data," said Christophe Barret, global analyst at Credit Agricole Corporate & Investment Bank.
Brent crude for September was 77 cents lower at $117.90 a barrel at 0828 GMT fell nearly $1, after falling by more that $1 earlier in the session.
U.S. oil was 83 cents lower at $99.04, paring losses of over $1 but off a six-week high of $99.87 on Friday.
That said, some analysts insist the prospect of a U.S. default or downgrade is remote and the collapse of weekend Congress talks is unlikely to have any real economic impact. The outcome of the latest Greek bailout package on the other hand remains highly uncertain, they say.
The collision in the U.S. Congress did hit world stocks and pushed gold to a new record high as money flowed to safer assets on Monday, as pre-weekend optimism over the euro zone debt solution faded.
"The most significant influence on the oil market is the concern that failing to raise the debt ceiling would mean the U.S. could either default or have to cut spending on a variety of social services," said Ben Westmore, a commodities economist at the National Australian Bank.
"If either of these happens, it would have a negative impact on U.S. oil demand, hence lower prices."
CHANCE OF CREDIT RATING CUT
Rating agency Standard & Poor's last week reiterated that there was a 50:50 chance the U.S. AAA credit rating could be cut within three months.
Further U.S. debt discussions were planned for Monday and broadly investors have been banking on a last-minute deal.
Raising the borrowing limit would avoid default, but would not necessarily end the threat by rating agencies to cut the U.S. economy's coveted triple-A rating, vulnerable because of the huge U.S. debt burden.
"The big question is whether ratings agencies will accept a medium-term deficit outcome from the negotiations," ANZ analysts said in a note.
"We expect volatility to increase in commodity markets as investors re-position to risk-off trades, while the U.S. debt ceiling is being negotiated."
On Friday, Brent crude jumped 1 percent to top $118 in light trade, buoyed by Europe's latest agreement to bail out Greece and by spread buying that widened the gap between London and U.S. crude.
Investors will be scouring U.S. data on oil stocks, new home sales and consumer confidence on Tuesday ahead of the country's second-quarter real GDP release on Friday.
