Oil Prices Fall on U.S. Default Concerns


NEW YORK (TheStreet) -- Crude oil futures were sinking Tuesday as traders held back on buying due to fears of demand destruction as the economy continued to show signs of deterioration and the threat of a U.S. debt default loomed.

West Texas Intermediate light sweet crude oil for September delivery was falling 94 cents to $98.26 and the September Brent crude contract was down 29 cents to $117.65 a barrel on light trading volume.

"Oil traders were worried that a debt showdown could lead to demand destruction initially, so when stocks took a dip, oil rammed things down," said PFGBest senior analyst Phil Flynn, referring to the U.S. debt ceiling debate and mixed economic news that were weighing on the broader markets.

"I think the markets are torn. The markets are nervous to make a commitment one way or another," said Flynn. "There are so many unanswered questions."

Stocks dipped despite a slight improvement in consumer confidence in July, as measured by the Conference Board, because Tuesday's economic news also included a 4.5% fall in U.S. home prices in May from a year ago and a falloff in new-home sales for June. Furthermore, a threat of a U.S. credit downgrade loomed as the Democrats and Republicans were in deadlock over a deal to raise the country's debt ceiling by Aug. 2.

President Barack Obama, in a televised address late Monday, said a breakdown in talks over raising the country's $14.3 trillion borrowing limit could seriously hurt the U.S. economy.

"Even though a weaker dollar should be lending support to crude, the dollar move is more related to a lack of confidence in the currency than the usual flight from it into riskier assets," said Summit Energy analyst Matt Smith. "Equities have now turned lower, and crude is also heading lower for the same reasons -- the economic data and the continued uncertainty in relation to the U.S. debt ceiling."

The U.S. dollar was slumping against a basket of currencies of the country's major trading partners, with the dollar index down 0.7% to $73.59.

ANZ Research analysts have trimmed their Brent crude forecast by $3 to $120 a barrel for the third quarter and WTI outlook by $12 to $100 citing pressure from limited investment appetite and macroeconomic headwinds.

"Demand prospects look poor after India raised interest rates 0.5% and the U.K. reported weak 0.2% GDP (gross domestic product) growth for the second quarter," added Citi Futures Perspective energy analyst Tim Evans. "We also have the ongoing risk that the U.S. may default. A weaker U.S. dollar could provide some support for oil prices, but the demand risks are more critical in my view."

Flynn of PFGBest said as long as stocks don't get "hammered," oil could easily bounce back up by $1 to $2 Tuesday.

Natural gas futures for September delivery were falling 1.2% to $4.304 per million British thermal units as record heat and air conditioning needs across the U.S. so far failed to work down supplies.

"Injections have been keeping up with consumption so far, although this Thursday's report will tell us if that held up during last week's heat wave," say Cameron Hanover analysts.

They expect it did. Their preliminary estimate is that 20 billion cubic feet were added to storage.

Oil and gas stocks were trading in mixed territory. Halliburton ( HAL) was falling 0.7% to $56.89, Schlumberger ( SLB) was lower by 0.3% to $94.39, National Oilwell Varco ( NOV) was rising 0.8% to $82.96 after the oilfield equipment maker topped second-quarter earnings estimates, Cameron International ( CAM) was down 0.4% to $52.09, Lucas Energy ( LEI) was rising 1.4% to $2.86, Chesapeake Energy ( EOG) was higher by 1.4% to $34.35 and Devon Energy ( DVN) was down 0.6% to $83.23.

>>For upcoming earnings and estimates, see our Earnings Calendar.

-- Written by Andrea Tse in New York.

>To contact the writer of this article, click here: Andrea Tse.

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