OIL prices slipped from two-week highs yesterday on reports that Standard & Poors may downgrade credit ratings for the wealthiest nations in Europe, dealing a serious blow to hopes for saving the euro.
The Financial Times reported that S&P will put Germany, France, the Netherlands, Austria, Finland, and Luxembourg on notice that it is reviewing their credit worthiness. Each has a one-in-two chance of a downgrade in the next 90 days, the newspaper said.
S&P wouldn't comment about the report.
If the credit ratings agency follows through with downgrades, it would suggest that some of the strongest nations in the eurozone will have trouble handling massive debts run up by their more profligate neighbors.
Oil markets reacted swiftly to the news.
Benchmark crude dropped by about 2 percent, or US$2 per barrel, in afternoon trading. After rising as high as US$102.44, the benchmark price ended the day about where it began, at US$100.99 per barrel, up just 3 cents.
Brent crude, which is used to price foreign oil varieties that are imported by US refineries, fell 15 cents to finish at US$109.53 a barrel in London.
Prices had been climbing earlier in the day after French and German leaders proposed tough new measures for a eurozone treaty that would keep members from overspending. A recession may be inevitable in Europe, but analysts said the proposal for tighter spending controls, balanced budgets and other measures was an important step in saving the euro and protecting against widespread bank failures.
The S&P warning, however, reminded investors that mounting European debts may be too big for the 17-nation currency bloc to handle on its own.
Other problems continue to weigh on world markets as well, including a slowdown in the Chinese economy. China is trying to maintain the strong growth that has made it the world's largest energy consumer. Business surveys released earlier this month showed that Chinese manufacturing activity in November contracted for the first time in nearly three years. China's economy relies heavily on exports, and the sluggish global economy has slowed demand.
"China has propped up the world economy for a long time," independent analyst and trader Jim Ritterbusch said. "That prop is starting to soften a bit."
In the US, the government said companies sent fewer orders to factories in October, the second straight monthly decline, while a private index showed that service companies expanded at a slower pace in November. The reports suggest that the world's largest oil consumer is still on a rocky road to recovery.
In other energy trading, heating oil and gasoline futures were flat, finishing at US$2.9924 and US$2.6137 per gallon, respectively. Natural gas fell 12.3 cents to end at US$3.4610 per 1,000 cubic feet.