Oil falls $3 as US downgrade spurs growth worries

LONDON: Oil fell as much as $3 a barrel on Monday as worries over a possible double-dip recession 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 US debt rating by S&P drowned out pledges of assistance from Europe's central bank and soothing words from the Group of Seven.

Investors piled 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 $105.79 before rallying to around $106.65 by 0855 GMT. US crude oil futures slid as low as $83.18 a barrel but had recovered to around $84.00 by 0855 GMT.

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

US oil is down around 7 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 $82.87, and about 43 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 US 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 Aug. 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 US oil.

US 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 American government, companies and consumers.

While parallels with the global financial crisis three years ago abound, analysts downplayed the likelihood of the sort of financial contagion experienced when Lehman Brothers went under in September 2008.

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/bbl under a recession scenario," Merrill Lynch analysts said in a note to clients.

Moody's repeated on Monday that it could cut the US 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.

Treasury Secretary Timothy Geithner said on Sunday US Treasury debt was as safe as it was before the downgrade and Congress' "damaging" debate over raising the country's debt limit. He criticised S&P's decision to cut the US sovereign rating.

In Europe, political and financial leaders gave their first sign of readiness to battle the debt crisis with the European Central Bank signalling it would start buying Italian and Spanish debt.

Copyright Reuters, 2011