Oil prices dipped below $120 a barrel on Friday on renewed fears about the state of the debt-ravaged eurozone economies following a downgrade of Spain’s credit rating.
Traders and investors took a more cautious stance after Standard & Poor’s reduced its credit rating on Spain by two notches to BBB+, citing expectations that the government’s finances will deteriorate even more than previously thought due to a shrinking economy and an ailing banking sector.
S&P also put a negative outlook on the credit and said Madrid’s situation could deteriorate further unless ambitious measures were taken at the European level.
Brent crude was down 42 cents to $119.50 a barrel by 0818 GMT, after rising in the past two sessions. U.S. crude oil slipped 39 cents to $104.16 a barrel.
“The cut by S&P was the main reason for the price fall overnight, but we also saw strong gains yesterday with oil rising back above $120 a barrel despite over-supply and signs that tensions over Iran are easing,” said Carsten Fritsch, an energy analyst at Commerzbank in Frankfurt. “Today’s decline is not a big surprise given this backdrop.”
Filip Petersson, a commodity strategist at SEB, agreed. “The general market sentiment is a bit bearish this morning. The direction in markets that offers the least resistance is down,” he said, noting that most markets were down about half a percent in early trade.
“We shouldn’t expect much of a turn in market sentiment until we get the U.S. Q1 GDP numbers this afternoon,” he added.
Preliminary estimates forecast U.S. first quarter GDP growing by 2.5 percent, slower than the 3 percent achieved in the fourth quarter of 2011.
It is likely to be sentiment rather than fundamentals that drives prices today, with markets also closely eyeing Italy’s bond auction. The S&P downgrade has pushed Spanish 10-year bond yields above 6 percent. Italy is coming to the market with a range of maturities.
“We saw yesterday that when market sentiment improves, the impact on prices is quite significant - so depending on the outcome of the bond auction and the U.S. GDP, this will set the tone for oil prices,” said Fritsch.
However, further out he sees the risk remaining to the downside, citing reports from Libya that it will exceed pre-war oil production levels by mid-2012.
“That will just add to the physical over-supply and should weigh on prices if the support from financial markets fades,” he said.