Oil drops as S&P cuts U.S. outlook, demand weak

Oil fell more than $2 on Monday after ratings agency S&P cut its U.S. credit outlook to negative, adding to losses sparked by top exporter Saudi Arabia saying weak demand had forced it to reduce crude output.

Although it affirmed the United States’ credit rating, Standard & Poor’s said there was a risk policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.

“The U.S. debt situation got a reality check this morning from the move by S&P,” said John Kilduff, partner at Again Capital in New York. “Only precious metals will be seen as attractive in the aftermath of the outlook downgrade.”

OPEC member Saudi Arabia on Sunday confirmed it had cut output by more than 800,000 barrels per day (bpd) in March because of weak demand.

Saudi Oil Minister Ali al-Naimi said the economic recovery remained patchy, while his Kuwaiti counterpart added that high oil prices could form a significant economic burden for many import-dependent countries.

U.S. equities slumped on the S&P action, with the Nasdaq falling 2 percent <.N>. Stock markets and oil felt pressure from another Chinese bank reserve hike, the latest move to control inflation that could curb demand growth.

Brent crude for June fell $2 to $121.45 a barrel by 10:41 a.m., having slipped as low as $121.00.

U.S. crude for May fell $2.63 to $107.03, having slipped as low as $106.74. The U.S. May crude contract expires on Tuesday.

Crude fell early last week on concerns that high oil prices were eroding demand, but rebounded late in the week on encouraging U.S. economic data and with help from falling gasoline inventories in the United States.

Euro zone debt concerns kept broad pressure on the euro on Monday, amid increased talk that Greece will be forced to restructure its debt and uncertainty over a bailout for Portugal, only paring losses after the S&P decision.

S&P said its outlook move signals a 1-in-3 chance it could cut its long-term credit rating on the United States within two years.

A stronger dollar makes oil more expensive for consumers using other currencies.

NEW YORK (Reuters) – By Robert Gibbons

(Additional reporting by Claire Milhench and Alex Lawler in London and Francis Kan in Singapore; Editing by Dale Hudson)