Oil plunged 5 percent on Monday, crashing below technical support levels as the reduction of the top-tier US credit rating hammered markets and stoked concerns of an economic slowdown. Brent crude broke through the 200-day moving average after shedding nearly $13 a barrel since the start of August in the first session since Standard & Poor's cut the AAA US credit rating.
"In the tumultuous aftermath of the US downgrade from S&P, the world also is downgrading the oil market," said Phil Flynn, analyst at PFGBest Research in Chicago. Trading volumes spiked as the oil sell-off accelerated late in the day, triggered by a rapid drop in stock markets that sent the S&P 500 Index down 6 percent, the biggest daily drop since late 2008. Brent crude dropped $5.63 to settle at $103.74 a barrel, substantially below the 200-day moving average of $106.89 that it had managed to settle above on Friday.
US crude traded down $5.57 to settle at $81.31 a barrel, the lowest close since November 23. It then dropped as low as $80.17 a barrel in post settlement activity. "We're watching the $80 area (for US oil) after taking out the morning lows, and the 1,100 area for the S&P 500, but there is so much uncertainty and fear about a double-dip recession that it's hard to say we'll find any support at those levels," said Gene McGillian, analyst for Tradition Energy in Stamford, Connecticut.
US crude trading volumes were nearly 30 percent over the 30-day average in late afternoon activity, while Brent volumes were 23 percent over that average. Investors again flocked to gold as a safe haven, sending prices to a record over $1,700 an ounce, while selling off other commodities including grains and copper.
The S&P downgrade added to concern about energy demand in the world's top oil consumer. US gasoline demand for July fell to the lowest level since 2003, according to data from the US Energy Information Administration. "Investors are looking at the weakness in the stock market as it signals that oil demand will be hurt," said Joe Posillico, broker for MF Global in New York City.
Oil company shares were slightly weaker than crude futures, with the CBOE Oil Companies Index shedding 6.30 percent, led by declines in EOG Resources, Apache Corp and Chevron Corp. Analysts warned oil prices could fall further if a second recession takes hold, but both Merrill Lynch and Goldman Sachs maintained their 2012 price forecasts.
"We believe that WTI crude oil prices could briefly drop to $50 under a recession scenario," Merrill Lynch said in a note, but it maintained its 2012 average forecast for US crude at $102 a barrel and its forecast for Brent next year at $114. Technical indicators also suggested the selling may abate. On the 14-day relative strength index, US oil dropped to 22, the lowest level since the third quarter of 2008 and well below the 30 level often interpreted as a sign a commodity has been oversold. Brent crude also dropped below 30 for the second time this month. Brent could revisit its August 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, according to Reuters technical analyst Wang Tao.
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