Singapore: Crude oil prices fell on Wednesday after ratings agency Moody’s assigned a negative outlook to the United States, inflaming worries of falling demand as the world’s top oil user and the euro zone continue to face long-term economic challenges.
Worries are growing that major economies may slip back into recession as Europe’s debt crisis deepens and after global manufacturing data proved disappointing this week. The slowdown is having a direct impact on US oil demand as consumer spending and gasoline use crumble.
Brent was 92 cents lower at $115.54 a barrel by 3:33pm, almost $12 below this year’s peak above $127. US crude fell 69 cents to $93.10 a barrel, the lowest intraday price since 29 June.
The passing of a deal saving the US from default triggered fleeting relief amid investors, but focus remained on the longer term challenges for the world’s largest economy and the euro zone’s troubles.
“Fears for demand destruction are ever-present, while weak manufacturing PMI numbers from across the globe this week only add fuel to economic concerns,” VTB Capital’s Andrey Kryuchenkov said. “The market is starting to look weak technically and persistent risk aversion on the broader market could drive crude lower in the short run. No one is prepared to go long just yet.”
Disappointing economic data also encouraged investors to reduce exposure to risk and seek the safe havens of the Swiss franc and gold.
“The markets have already moved on to their next source of concern - a world without growth”, PVM ‘s David Hufton wrote in a note. “‘It’s the global economy stupid´ is on everyone’s lips, along with alarm at the failure of the euro zone agreement to draw a line under Europe’s debt crisis”.
Spanish and Italian 10-year government bond yield spreads over the benchmark German bund widened further on Wednesday as contagion from the euro zone debt crisis continued to spread amid a bleak outlook for global growth.
In Spain, data from the dominant services sector showed a sharp contraction in July, mirroring the weakness in factory output and signalling that the fragile economy could contract in the third quarter.
MOODY’S ASSIGNS NEGATIVE OUTLOOK
Moody’s Investors Service late on Tuesday confirmed its Aaa rating of the United States, citing the decision to raise the debt limit, but assigned a negative outlook that could pressure lawmakers to cut the deficit.
The decision by Moody’s came a few hours after rival Fitch Ratings upheld its AAA rating of the US Fitch also warned the world’s largest economy must cut its debt burden to avoid a future downgrade.
The greater need for fiscal discipline comes as the slowdown of the US economy intensifies.
US consumer spending dropped in June for the first time in nearly two years and incomes barely rose, signs the economy lacked momentum as the second quarter drew to a close.
The nation’s retail gasoline demand fell 3.1% in the week to 29 July from a year earlier, as price gains since the beginning of July weighed on consumption, MasterCard said.
Industry group the American Petroleum Institute on Tuesday said gasoline stocks jumped a bigger-than-expected 2.5 million barrels and distillate stocks rose in line with forecasts by 1.4 million barrels.
US crude inventories unexpectedly fell 3.3 million barrels last week. Inventory statistics from the US government’s Energy Information Administration will follow on Wednesday.
Tuesday’s data followed weak manufacturing readings a day earlier from the US, Europe and China and last week’s disappointing second-quarter US GDP estimate, which reinforced fears that slowing economic growth threatens to dampen oil demand.
A series of US employment data releases from Wednesday through Friday will be closely watched.
In other markets, Asian stocks fell for a second successive day on Wednesday as fears increased that Washington’s efforts to cut spending will slow growth at a time when global industrial activity is already sluggish.
Europe’s sovereign debt crisis also contributed to the gloom - Italian bond yields hit their highest in the euro’s 11-year lifetime on Tuesday.