London: Oil futures dropped below $118 a barrel after a breakdown of budget talks in the US Congress over the weekend helped drive investors away from volatile and risky assets on Monday.
Worries about a US credit rating downgrade or even default dampened hope for stronger global economic growth after a new bailout deal for Greece helped propel Brent to a high of $118.80 a barrel on Friday.
“After all the excitement on the economic front last week, attention will return to the fundamentals, particularly US weekly data,” said Christophe Barret, global analyst at Credit Agricole Corporate & Investment Bank.
Brent crude for September was 80 cents lower at $117.87 a barrel at 03:15 pm, after falling by more that $1 earlier in the session.
US oil was 57 cents lower at $99.30, paring losses of more than $1 but off a six-week high of $99.87 on Friday.
With oil prices only marginally off last week’s highs, some analysts maintained that worries about a US default remained remote and were unlikely to translate into a real economic crisis.
“The political circus over the US debt level will probably last until the last hours before Aug. 2nd,” Olivier Jakob of Petromatrix said in a note.
“There are enough demand uncertainties to maintain speculators on the sideline of the oil trade,” he concluded.
The US Congress collision sent gold to a fresh peak, and the Swiss franc rose to a record high against the dollar as money flowed to safer assets on Monday and pre-weekend optimism over the euro zone debt solution faded.
Not all analysts were convinced the outlook for oil was untouched by the weekend’s developments.
“We are slipping away a bit, waiting to see if the US sorts out its debt. Markets will be nervous until a solution is found,” said Rob Montefusco, an oil trader at Sucden Financial.
The United States is the world’s largest oil consumer. Further US debt discussions have been planned for Monday, and broadly investors have been banking on a last-minute deal.
While raising the borrowing limit would avoid default, it would not necessarily end the threat by rating agencies to cut the US economy’s triple-A rating, now clouded by its huge debt burden.
“The most significant influence on the oil market is the concern that failing to raise the debt ceiling would mean the US could either default or have to cut spending on a variety of social services,” said Ben Westmore, a commodities economist at the National Australian Bank.
“If either of these happens, it would have a negative impact on US oil demand, hence lower prices.”
Rating agency Standard & Poor’s last week reiterated that there was a 50:50 chance the US AAA credit rating could be cut within three months.
“The big question is whether ratings agencies will accept a medium-term deficit outcome from the negotiations,” ANZ analysts said in a note.
“We expect volatility to increase in commodity markets as investors re-position to risk-off trades, while the US debt ceiling is being negotiated.”
In the week to 19 July, speculators raised their net long positions on the main two oil contracts, Brent and gasoil, traded on the IntercontinentalExchange (ICE), the trading platform said on Monday.