Oil tumbles as U.S. downgrade spurs growth concerns

By @ibtimes on

Oil fell more than $4 a barrel on Monday as worries over economic growth spread after Standard & Poor's cut the United States' top-tier credit rating and European central banks struggled to contain a deepening debt crisis.

Fear gripped financial markets as the fallout from the historic downgrade of the U.S. debt rating by S&P drowned out pledges of assistance from Europe's central bank and soothing words from the Group of Seven.

The European Central Bank stepped into bond markets on Monday, backing up a pledge to support Spain and Italy to help avert financial meltdown in the euro zone.

But investors headed for safe havens, piling into gold, which hit a new record above $1,715 an ounce, while many commodities and share markets fell.

Chances of a double-dip recession have increased over the last week, said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt. I still don't think another recession is a probability, but economic growth forecasts are being lowered.

Brent crude slumped to a low of $105.43 before edging up to around $106.60 by 9:45 a.m. EDT.

U.S. crude futures slid to their lowest intra-day level since November at $82.52 a barrel but then recovered a little to around $84.00.

Goldman Sachs said on Monday it maintained overweight recommendation on commodities and oil relative to other assets, although is added that risk to its constructive commodity views had risen.

The sharp sell-off across the commodity complex in recent days reinforces these views, Goldman said in a research note.

REBOUND POSSIBLE

U.S. oil is down around 8 percent this year compared with a rise of 15 percent last year, swinging between a high of $114.83 a barrel and a low of $82.52, and about 44 percent lower than the all-time high of $147.27 touched in 2008.

Brent has gained 13 percent, staying between $127.02 and $92.37, against an increase of 22 percent last year.

The recent sell-off has pushed down sharply relative-strength indexes (RSIs) for both Brent and U.S. crude oil, suggesting both complexes may have fallen too fast, and encouraging some traders and analysts to look for a rally.

Despite all the negative news, we could see a rebound in oil, although it might not last for long, said Weinberg.

Reuters technical analyst Wang Tao said Brent could revisit its August 5 low of $104.30 per barrel, as a medium-term downtrend was expected to develop further, while a bearish target at $81.35 was unchanged for U.S. oil.

U.S. stock index futures opened sharply lower in the first trading in domestic equities after the downgrade on concerns the move was likely to raise borrowing costs for the U.S. government, companies and consumers. <.N>

Analysts said oil prices could fall much further if another recession took hold.

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.

Moody's repeated on Monday that it could cut the U.S. rating before 2013 if the fiscal or economic outlook weakened significantly, but said it saw the potential for a new debt agreement in Washington to cut the budget deficit before then.

(Additional reporting by Manash Goswami in Singapore; editing by William Hardy)

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