London: Oil prices fell on Friday after ratings agency Standard & Poor’s warned it may cut the credit rating of top energy consumer the United States, capping a volatile week marked by concern about the country’s deficit and the euro zone’s debt.
Brent crude for September was down 58 cents to $115.68 a barrel by 03:30 pm, after the expiry of the August contract on Thursday at $118.32.
US crude was down 11 cents at $95.58, after falling more than $2 on Thursday.
S&P joined Moody’s Investors Service in putting the US on negative watch, warning that there was a one-in-two chance it could cut the prized triple-A rating within the next 90 days if a deal to raise the government’s debt ceiling is not struck by the White House and Republicans.
In addition, mid-week comments by Federal Reserve chairman Ben Bernanke had raised hopes the US central bank would embark on a third round of economic stimulus, but on Thursday he said the Fed was not yet ready to take action because inflation was higher than in late 2010.
“It is overall economic concerns that are driving the oil price this morning,” said Eugen Weinberg, a senior commodity analyst at Commerzbank in Frankfurt.
“The prospects of quantitative easing III were put on ice for some time and we also had a warning from S&P that if the debt ceiling isn’t agreed over the next few days a downgrade of US debt is likely.”
Thorbjorn Bak Jensen, oil analyst at Global Risk Management said he believed a solution would be found, “otherwise there is still the possibility that Obama can veto his way through Congress with only one third of the votes”.
President Barack Obama has given congressional leaders a weekend deadline to find a way to raise the US debt ceiling, but a divide over spending and taxes remains a huge hurdle to a deficit-cutting deal.
With another busy day ahead for US economic data, Weinberg said the market would be looking for signs of weakness that might increase the likelihood of further quantitative easing.
Policymakers and bankers are also examining radical proposals to rescue Greece such as a sharp cut in its debt burden, ways to prop up banks and a new emphasis on boosting Greek growth, official and banking sources say.
However, Olivier Jakob, oil analyst at Petromatrix argued it was difficult to find enough inputs in the oil fundamentals to put a position on, and he expects to see a slower trading day on Friday.
The market is also weighing the possibility of a second round of strategic oil reserve releases, after the US was reported to be considering it.
Germany and Italy are likely to oppose a second release a French government source said on Friday.
Analysts like Commerzbank’s Weinberg believe the market is well-supplied, a view reiterated by Iran’s caretaker oil minister, who said there is plenty of oil to satisfy global demand and no need to increase production.
Britain’s largest oilfield, Buzzard, should return to full output in August, its operator Nexen said on Thursday, boosting supply of the North Sea crude that helps to set the global Brent oil benchmark.