Global crude oil futures declined yesterday as global equity markets dropped, the dollar fell against the Franc and the Yen, and gold hit a new record, all direct fallouts of last week's downgrade of US debt by credit ratings agency Standard & Poor's (S&P).
Benefiting from the gloom, gold climbed to an all-time high above $1,715 an ounce, its 11th record in 19 sessions, as investors snapped up the precious metal. Gold has gained more than 20 per cent so far this year.
Dominic Schnider, executive director for wealth management research at UBS, said gold may even be headed to $2,000 per ounce.
Oil prices fell more than $3 a barrel in early trade over fears of slowing energy demand in the US, the world's largest importer of crude.
The market is bracing for lower global oil demand in the weeks ahead as increase in interest rates in China and India seem to have slammed brakes on new oil demand from Asia.
At 1755 hours Abu Dhabi time yesterday, light sweet crude oil (WTI) futures for September 2011 delivery in the United States were trading 2.83 per cent lower at $84.05 a barrel on the New York Mercantile Exchange. Brent crude futures slumped to $105.43 before edging up to around $106.00 by 1245 GMT.
Goldman Sachs said yesterday it maintained overweight recommendation on commodities and oil relative to other assets.
"How much further oil prices will go down is anybody's guess. We are in uncharted territory," Kate Dourian, Middle East editor for Platts, a global energy information provider, told Gulf News.
"The fundamentals of the market haven't changed," said Dourian.
The S&P stripped the US of its prized AAA credit rating, lowering it one level to AA+ while keeping the outlook at ‘negative,' for the first time since 1941, stating that the US government hadn't done enough to stem mounting debt. The US narrowly missed defaulting on its debt obligations by agreeing to raise the nation's borrowing ceiling on August 2.
The total US government debt — in excess of $14.3 trillion — is at uncomfortable levels as this is very close to the country's overall gross domestic product (GDP).
The downgrade stoked fears that the borrowing costs for the world's largest economy, which is currently grappling with an economic slowdown, are going to increase, which may send the country and the global economy spiralling back into recession.