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Crude oil prices fall after S&P downgrades US debt

Crude oil prices dropped more than $3 a barrel on Monday to about $83. The drop brings crude oil prices down more than $30 since May.

By Pablo GorondiAssociated Press / August 8, 2011

Traders work the crude oil options pit at the New York Mercantile Exchange Friday, Aug. 5, 2011 in New York. A major sell-off in Asia and Europe pulled crude oil prices down on Monday.

Mary Altaffer / AP

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Oil prices fell over $3 to near $83 a barrel Monday after Standard & Poor's downgraded the U.S.'s credit rating — a blow to confidence that could hurt economic growth and demand for crude.

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By early afternoon in Europe, benchmark oil for September delivery was down $3.52 to $83.36 a barrel in electronic trading on the New York Mercantile Exchange. Crude rose 25 cents to settle at $86.88 on Friday.

In London, Brent crude was down $3.58 at $105.79 per barrel on the ICE Futures exchange.

Oil plunged after Standard & Poor's announced Friday it was lowering its rating for U.S. debt one notch from AAA to AA+. Investors are concerned the first-ever U.S. debt rating downgrade will batter already weakening consumer confidence and hurt economic growth.

Crude has dropped from $100 last month and near $115 in May.

"A drastic weakening of sentiment has brought oil prices down sharply, with sovereign debt fears key in a mounting loss of faith in economic, and hence demand, prospects," Barclays Capital said in a report.

Crude traders often look to stock prices as a barometer of overall investor confidence, and oil prices were swept down Monday by a major sell-off across Asian stock markets, followed by falling indices in Europe, as well.

"Further losses can be expected in the near term, as financial investors should reduce risk positions on the back of high risk aversion and the uncertain economic outlook," said analysts at Commerzbank in Frankfurt.

Concerns over debt problems faced by several members of the European Union contributed to the overall negative tone and the bearish action in markets across the continent, even as the European Central Bank promised to buy up Spanish and Italian bonds to help the two countries avoid devastating defaults.

Despite growing fears of a recession in the U.S., some analysts expect global economic growth to remain robust, supporting oil prices. Goldman Sachs recommended investors buy the Brent December 2012 futures contract, forecasting Brent will average $130 next year.

"We maintain that commodity markets will continue to tighten as long as global economic growth remains broadly positive and the emerging market economies in particular continue to perform," Goldman Sachs said in a report. "We expect that the market will continue to tighten to critical levels by 2012, pushing oil prices substantially higher to restrain demand."

In other Nymex trading in September contracts, heating oil fell 8.1 cents to $2.8607 a gallon while gasoline dropped 7.8 cents at $2.7272 a gallon. Natural gas futures slid 6.6 cents at $3.875 per 1,000 cubic feet.

Alex Kennedy in Singapore contributed to this report.

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