Oil fell sharply on Monday after ratings agency S&P revised lower its U.S. credit outlook to negative and OPEC ministers said high crude prices could place a major strain on consumer countries’ economies.

Although it affirmed the United States’ credit rating, Standard & Poor’s said there was a risk policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.

“The U.S. debt situation got a reality check this morning from the move by S&P,” said John Kilduff, partner at Again Capital in New York. “Only precious metals will be seen as attractive in the aftermath of the outlook downgrade.”

The American Petroleum Institute said late Tuesday that gasoline inventories fell 1.8 million barrels last week, following a plunge of 7 million barrels the previous week. The API also said crude supplies rose 667,000 barrels while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had forecast an increase of 1.6 million barrels.

The IEA has already warned that high oil prices are threatening to slow global economic expansion, which would in turn erode the pace of growth in fuel demand.
A sustained price of $100 or more for the rest of 2011 would cause demand destruction similar to 2008, Tanaka told Reuters in an interview.
The impact of higher prices was outlined by John Sfakianakis, chief economist at the Riyadh-based Banque

Saudi Fransi. He said, “If oil prices surge further, they could threaten recovery of the global economy, which is already complicated and difficult due to a variety of risks.”

Sfakianakis said, “The ratio of oil expenses to global GDP above 4% (current global levels) has historically been a sign of economic hardship.”

Crude prices jumped sharply in February amid geopolitical tension in the oil-producing Middle East and North Africa. Oil production in Libya has been severely disrupted by the ongoing conflict there, further underpinning crude.


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