Oil slumps as US downgrade stokes demand worries

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Crude oil prices slumped Monday on mounting fears of slowing energy demand in the United States after a historic credit rating downgrade, analysts said.

Traders also took their cue from tumbling global stock markets, which dived lower on mounting concern over a potential economic downturn.

New York's main contract, West Texas Intermediate light, sweet crude for delivery in September, plunged $3.33 to $83.55 a barrel.

Brent North Sea crude for September shed $3.40 to $105.97 a barrel in late afternoon London deals.

"Crude oil prices started the week on a negative side ... as investors prompted to a heavy sell off amid worries about weak US oil demand for the medium term," said Sucden analyst Myrto Sokou.

After markets closed for business on Friday, Standard & Poor's shocked the world as it became the first ratings agency to scrap Washington's cherished triple-A credit rating.

S&P downgraded the United States to AA+ with a negative outlook, citing concerns over its massive debt. The US is the world's biggest consumer of crude oil.

"Prices are subsequently under enormous pressure as the new trading week kicks off," said Commerzbank analyst Carsten Fritsch.

"Further losses can be expected in the near term as financial investors should reduce risk positions on the back of high risk aversion and the uncertain economic outlook."

S&P said Washington's debt and its rising fiscal deficits meant it could no longer be included among the world's most risk-worthy sovereign borrowers.

The agency also stressed what it saw as the inability of the US political establishment to commit to an adequate and credible debt reduction plan.

"The S&P downgrade of US debt was announced after the US markets closed on Friday," said Westhouse Securities analyst Andrew Matharu. "Crude prices are sharply down on this news and further concerns over European debt."

Global equity and oil markets have spiralled lower on concern that the slowing US economy and spreading eurozone debt contagion could spark a vicious new global economic downturn.

Financial markets remain on edge over concerns that Italy and Spain could fall victim to the eurozone debt crisis, which has already snared Greece, Ireland and Portugal.

With anxiety high that debt could plunge the world into a new financial crisis, the European Central Bank signalled late Sunday that it would make major purchases of eurozone government bonds, which market sources indicated on Monday had included Italy and Spain.


© 2011 AFP

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