Crude futures fell Friday in tandem with a slumping euro as Standard & Poor's prepared to downgrade France's credit rating, adding new fears about Europe's economy.
The ratings service notified the French government and other European governments that it will lower their debt ratings, according to reports Friday, sending the euro to 16-month lows against the dollar and taking the wind out of riskier assets such as oil, stocks and other commodities.
The news of imminent downgrades renewed worries about a potential stumbling block for the global economy, and oil demand. Traders quickly switched gears to focus on Europe's credit crisis after a sell-off Thursday was sparked by potential delays to the E.U. embargo on Iranian oil.
"We started the week terrified about Iran, and we ended the week focused on Europe again," said Peter Beutel, head of trading advisor Cameron Hanover. "There's been a wet blanket thrown over commodities, stocks, currencies and it's due to the S&P downgrades."
Light, sweet crude for February delivery settled 40 cents, or 0.4%, lower at $98.70 a barrel on the New York Mercantile Exchange, after falling as low as $97.70 a barrel earlier in the session.
Brent crude on the ICE futures exchange traded 28 cents lower at $110.92 a barrel.
Oil fell in tandem with a drop in the euro as traders fled riskier assets. The euro fell as low as $1.2624. Oil typically falls when the dollar rises, as it makes crude more expensive for buyers using other currencies.
Futures have tumbled from well above $100 earlier this week, with declines centered on a potential delay in the E.U.'s Iranian oil embargo by as much as six month. Plans for the ban had raised tensions between Iran and the west, with Iran threatening to shut down the Strait of Hormuz, a chokepoint for a third of the world's waterborne oil shipments.
Traders said the S&P downgrades could have resulted in a steeper sell-off, but with tensions still high surrounding the Strait, it remains risky to bet on lower prices.
"It's tough to sell with both hands with this Iran stuff still in the background," said Pete Donovan, vice president and trader at Vantage Trading.
Still, some analysts predict oil has further to climb. Goldman Sachs Group Inc. (GS) on Friday increased its oil price forecast, citing more positive near-term economic developments in the U.S. and China.
The bank increased its forecast for West Texas Intermediate crude by 8%, to $113 a barrel on a three-month basis, from $104.50 a barrel. It also increased its six-month forecast to $115 a barrel from $113.50 a barrel and its 12-month outlook to $123.50 a barrel from $122.50 a barrel.
Front-month February reformulated gasoline blendstock, or RBOB, settled 0.29 cent higher at $2.7342 a gallon. February heating oil settled 2.69 cents lower at $3.0272 a gallon.
Copyright (c) 2012 Dow Jones & Company, Inc.
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