BUSINESS
04/19/2011 08:20 am ET | Updated Jun 19, 2011

Oil Prices Drop To $120 Average On Concerns About Low Demand

LONDON (Jessica Donati and Caroline Copley) - Brent crude oil fell on Tuesday, slipping below $120 a barrel for the first time in two weeks, pressured by concern about the economic outlook and that high prices could erode demand.

Expectations Greece would be forced to restructure its debt added to a bleak economic picture on Tuesday, a day after ratings agency S&P cut its outlook for U.S. credit.

Brent crude for June fell $1.75 to $119.86 a barrel by 1100 GMT, trading on Tuesday below $120 for the first time since April 5. U.S. crude for May, which expires later on Tuesday, was down 99 cents at $106.13.

"I think essentially there's been no new oil-related stories and what you are trading off is macroeconomic stories... so that's weighing on the market," said Amrita Sen at Barclays Capital.

OPEC Secretary General Abdullah al-Badri, speaking at an oil and gas trade fair in Tehran, said he did not expect oil to fall below $100 this year, even though there was no shortage in the market.

He reiterated OPEC's call on consumer nations to revise their tax systems to address what he called "exceptional circumstances," so as to lessen the burden of high prices.

The Organization of the Petroleum Exporting Countries has so far declined to take any formal action to cool oil's rally. Underlining that stance, Iran's oil minister said on Tuesday any increase in output would not bring down prices.

Top world exporter Saudi Arabia said over the weekend it had cut oil production by 800,000 barrels per day (bpd) in March, returning output to December levels, because of weak demand.

ECONOMY CONCERNS

Oil also fell on Monday after ratings agency S&P revised lower its U.S. credit outlook to negative.

In Europe, financial markets are increasingly convinced Greece will have to renegotiate the terms of its public debt, recognizing that its economy cannot grow fast enough to service a burden that is set to swell to 160 percent of national output.

"I guess they're all worried about the economic outlook... the downgrading of U.S. debt and the Euro zone with Portugal and now they're worried about Greece... that seems to be the main thing," said Roy Jordan at Facts Global Energy.

Concerns about how China's attempts to slow economic growth could impact oil demand, as well as high crude inventories in top consumer the United States, were also pressuring oil prices.

"You have to start readjusting the value of the commodity," Jonathan Barratt, managing director of Commodity Broking Services in Melbourne said. "All the pressure points that we had before are not there."

Unrest in the Middle East remained a potential threat to supply as fighting escalated in Syria on Tuesday, while tension in Bahrain continued to require the presence of Saudi and UAE forces there.

In Libya, which pumped 1.6 million bpd or almost 2 percent of world supply before the conflict, oil trade remains at a virtual standstill.

"The tension does not seem to be getting any better," said John Vautrain of consulting firm Purvin & Gertz. "And we've now got some growing tension between Iran and Saudi Arabia. Brent still could go up in the next week or two."

(Editing by Alex Lawler and James Jukwey)

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