GL: Oil declines to near US$106 in Europe as S&P cuts US debt outlook
Oil prices fell to near $106 a barrel Tuesday after a credit ratings agency warned it could downgrade the United States, highlighting uncertainty about economic growth and demand for crude.
By midday in Europe, benchmark crude for May delivery was down 92 cents at $106.20 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $2.54, or 2.3 per cent, to settle at $107.12 on Monday.
In London, Brent crude for June delivery was down $1.31 to $120.30 a barrel on the ICE Futures exchange.
Concerns expressed by OPEC officials about surging oil prices and their dampening effect on demand also helped push the market lower.
"In this climate, oil is unlikely to advance much further," said analysts at Commerzbank in Frankfurt. "The civil war in Libya and continuing unrest in other Arab countries will probably prevent the risk premium and oil prices from falling very far, but only new factors would be likely to push them up again."
On Monday, Standard & Poor's Ratings Service lowered its outlook for the U.S. long-term debt rating to "negative" from "stable." S&P didn't reduce its AAA rating but warned that the country's $1.5 trillion deficit, at 11 per cent of gross domestic product, was too high.
Runaway debt could lead to a weaker dollar and faster inflation, triggering higher interest rates and slower economic growth, analysts said. The announcement also raised concerns about the possibility of cuts in government spending.
Crude prices have zigzagged near $108 this month, jumping to as high as $113 last week, after surging from $84 in February as traders mull whether global economic growth and oil consumption is strong enough to justify extending the rally.
Some analysts expect the U.S. dollar to continue to weaken, which would help send oil prices higher. A weaker U.S. currency makes dollar-based commodities such as oil cheaper for investors with other currencies.
Crude could reach $119 by next month, Ritterbusch and Associates said.
"We're viewing the sell-off as another correction in a bull market, one that could be followed by fresh highs," Ritterbusch said. "The U.S. dollar will likely come under renewed downside pressures this week."
In other Nymex trading in May contracts, heating oil fell 3.16 cents to $3.1512 a gallon and gasoline dropped 3.68 cents at $3.216 a gallon. Natural gas futures advanced 0.1 cent to $4.139 per 1,000 cubic feet.
