Oil drops on Spanish debt downgrade


INVESTOR jitters about Europe snuffed out a rally in the price of oil yesterday.

Oil was trading above US$92 per barrel but reversed course after Egan Jones downgraded Spain's debt, dropping it further into junk status. The ratings agency warned that widespread unemployment and a contracting economy will make it tough for Spain to repay its debts. The euro also plunged to a 22-month low.

The price of oil dropped about 2 percent in less than 30 minutes. Benchmark US crude ended the day down 10 cents at US$90.76 per barrel on the New York Mercantile Exchange. Brent crude, which helps set the price for oil imported into the US, lost 43 cents to finish at US$106.68 per barrel in London.

Analysts have been concerned that Spain and other weak European economies could drag the European Union into recession this year. That would not only impact Europe, a region that consumes 16 percent of the world's oil. It also could harm trading partners like the US and China and slow down global demand for oil.

"That lack of confidence is coming in to the marketplace," PFGBest analyst Phil Flynn said.

As the euro tumbled, the dollar rose versus other major currencies and helped cut into the price of oil. Oil, which is priced in dollars, tends to drop in price as a rising dollar makes oil more expensive for foreign investors.

The euro fell with a series of troubling developments in Spain. Retail sales plunged 9.8 percent last month, compared with a year ago. That's more than double the sales decline in March. Spain's fourth-largest bank also announced late last week that it would need an additional US$24 billion in state aid.

Spain already is in a recession with a 24.4 percent jobless rate.

In the US, a private research group reported that US consumer confidence fell this month compared with April. That's a disappointing sign for an economy that's driven by consumer spending.

In other futures trading, natural gas lost 13.9 cents to end at US$2.429 per 1,000 cubic feet. Natural gas has lost about 22 cents in the past two trading sessions.

Heating oil lost 2 cents to finish at US$2.8088 per gallon while wholesale gasoline added 1.36 cents to finish at US$2.9065 per gallon.



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