Oil plunged 5 percent on Monday, crashing below technical support levels as the reduction of the top-tier U.S. credit rating hammered markets and stoked concerns of an economic slowdown.
Brent crude broke below the 200-day moving average, extending a correction that has sent prices off more than 18 percent from 2011 peaks hit in April as traders weighed the prospect of a second recession on the already shaky oil demand outlook. Prices are down $13 a barrel since the start of August alone.
In the tumultuous aftermath of the U.S. downgrade from S&P, the world also is downgrading the oil market, said Phil Flynn, analyst at PFGBest Research in Chicago.
Trading volumes spiked as the oil sell-off accelerated late in the day, triggered as stock markets tumbled in the first session since Standard & Poor's cut the AAA U.S. credit rating.
The S&P 500 Index slid 6 percent in its biggest daily drop since December 1, 2008, while the Dow Jones industrial average lost 5.55 percent.
Brent crude dropped $5.63 to settle at $103.74 a barrel, substantially below the 200-day moving average of $106.89 and down more than $23 from the 2011 peak over $127 a barrel hit in April.
U.S. crude traded down $5.57 to settle at $81.31 a barrel, the lowest close since November 23. It then dropped as low as $80.17 a barrel in post-settlement activity, down $34 from the 2011 peak of $114 a barrel struck on May 2.
There is so much uncertainty and fear about a double-dip recession that it's hard to say we'll find any support at those levels, said Gene McGillian, analyst for Tradition Energy in Stamford, Connecticut, who added he was watching for a break below $80 a barrel on U.S. crude.
U.S. crude trading volumes were nearly 40 percent over the 30-day average and Brent volumes were 28 percent over that average in late afternoon activity.
Brent's premium to U.S. crude also blew out more than $1 to $23.54 a barrel in late activity, just three cents shy of the record hit in July.
Investors again flocked to gold as a safe haven, sending prices to a record over $1,700 an ounce, while selling off other commodities including grains and copper.
U.S. Treasury prices also soared, with benchmark 10-year notes at one point rising over two points in price. Yields fell as low as 2.33 percent, the lowest since February 2009.
The S&P downgrade added to concern about energy demand in the world's top oil consumer. U.S. gasoline demand for July fell to the lowest level since 2003, according to data from the U.S. Energy Information Administration.
Investors are looking at the weakness in the stock market as it signals that oil demand will be hurt, said Joe Posillico, broker for MF Global in New York City.
Analysts polled by Reuters forecast weekly oil inventory data would reinforce the bearish picture, with crude stockpiles seen up 1.5 million barrels for the week to August 5, with gasoline and distillate stockpiles also expected to show a build.
Oil company shares were slightly weaker than crude futures, with the CBOE Oil Companies Index shedding 6.30 percent, led by declines in EOG Resources
Analysts warned oil prices could fall further if a second recession takes hold, but both Merrill Lynch and Goldman Sachs maintained their 2012 price forecasts.
We believe that WTI crude oil prices could briefly drop to $50 under a recession scenario, Merrill Lynch said in a note, but it maintained its 2012 average forecast for U.S. crude at $102 a barrel and its forecast for Brent next year at $114.
Technical indicators also suggested the selling may abate. On the 14-day relative strength index, U.S. oil dropped to 22, the lowest level since the third quarter of 2008 and well below the 30 level often interpreted as a sign a commodity has been oversold. Brent crude also dropped below 30 for the second time this month.
(Reporting by Matthew Robinson, Edward McAllister, Robert Gibbons, Selam Gebrekidan, Matt Daily and Gene Ramos in New York; Christopher Johnson in London and Manash Goswami in Singapore; Editing by Marguerita Choy and David Gregorio)