Oil falls below $107 as S&P cuts US debt outlook

Published 5:16 pm Tuesday, April 19, 2011

Oil prices fell below $107 a barrel Tuesday in Asia after a credit agency cut the outlook of its U.S. rating, raising concerns about economic growth and crude demand.

Benchmark crude for May delivery was down 49 cents at $106.63 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract fell $2.54, or 2.3 percent, to settle at $107.12 on Monday.

In London, Brent crude for June delivery was down 43 cents to $121.18 a barrel on the ICE Futures exchange.

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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.

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 percent of gross domestic product, was too high.

“The S&P move gives the bears a fresh lease on a correction in oil prices,” Cameron Hanover said in a report. “It was game on for the bears.”

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 1 cents to $3.17 a gallon and gasoline dropped 0.8 cents at $3.25 a gallon. Natural gas futures were down 0.2 cent at $4.14 per 1,000 cubic feet.