Oil prices slump as US downgrade stokes demand worries

LONDON—Oil prices slumped more than $3 Monday over fears of slowing energy demand in the United States after a shock credit rating downgrade for the world’s biggest economy, analysts said.

New York’s main contract, West Texas Intermediate light, sweet crude for delivery in September, plunged $3.01 to $83.87 a barrel.

Brent North Sea crude for September shed $3.47 to $105.90 a barrel in London deals shortly after midday.

After markets closed for business on Friday, Standard & Poor’s shocked the world as it became the first ratings agency to scrap Washington’s cherished triple-A credit rating.

S&P downgraded the United States to AA+ with a negative outlook, citing concerns over its massive debt.

“Prices are subsequently under enormous pressure as the new trading week kicks off,” said Commerzbank analyst Carsten Fritsch.

“Further losses can be expected in the near term as financial investors should reduce risk positions on the back of high risk aversion and the uncertain economic outlook.”

The US is the world’s biggest consumer of crude oil.

S&P said Washington’s debt and its rising fiscal deficits meant it could no longer be included among the world’s most risk-worthy sovereign borrowers.

The agency also stressed what it saw as the inability of the US political establishment to commit to an adequate and credible debt reduction plan.

“The S&P downgrade of US debt was announced after the US markets closed on Friday,” said Westhouse Securities analyst Andrew Matharu. “Crude prices are sharply down on this news and further concerns over European debt.”

Global equity and oil markets spiralled lower last week on concern that the slowing US economy and spreading eurozone debt contagion could spark a vicious new global economic downturn.

Financial markets remain on edge over concerns that Italy and Spain could fall victim to the eurozone debt crisis, which has already snared Greece, Ireland and Portugal.

With anxiety high that eurozone and US debt could plunge the world into a new financial crisis, the European Central Bank signalled late Sunday that it would make major purchases of eurozone government bonds, which market sources indicated on Monday had included Italy and Spain.

Meanwhile, the Group of Seven (G7) vowed to support financial stability as jittery markets reopened on Monday.

“We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth,” said a statement from the G7 industrialised economies.

“We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth, and welcome the decisive actions taken in the US and Europe,” it added.