OIL tumbled amid a broad sell-off, after ratings agency Standard & Poor's cut its outlook on US government debt.
S&P lowered its outlook to negative from stable, drawing attention to the mounting debt and political gridlock in the US and sending investors running from riskier assets.
Commodities including oil and fuel products fell across the board, along with a sharp drop in the Dow Jones Industrial Average. Gold, considered a safe-haven investment, moved higher.
Light, sweet crude oil for May delivery settled $US2.54, or 2.3 per cent, lower at $US107.12 a barrel on the New York Mercantile Exchange. Brent crude oil for June delivery on the ICE futures exchange settled $US1.84 lower at $US121.61 a barrel.
"Let's face it, it's a wake-up call," said Phil Flynn, an oil analyst with PFGBest in Chicago. "S&P has sent us a warning sign, and, in the meantime, the market is pricing in the 'what if?'"
The S&P move, which could signal higher borrowing costs for the US in the future, added further jitters to an oil market already concerned that high energy prices are raising costs for businesses and straining consumers' budgets.
Oil futures have fallen from a two-and-a-half year high above $US113 a barrel earlier this month on early indications that high fuel prices are lowering energy consumption.
Last night, Saudi Arabia Oil Minister Ali al-Naimi said the kingdom has cut its oil production due to lack of demand, after raising output last month to help replace lost Libyan supplies.
The remarks were the first in what became a chorus from members of the Organisation of Petroleum Exporting Countries echoing Mr Naimi's suggestion that the supply of crude oil was plentiful.
Saudi Arabia, the biggest crude producer in OPEC, cut oil production by 800,000 barrels a day in March, Mr Naimi said in remarks carried by state-run Kuwait News Agency. Saudi Arabia's crude oil output stood at 8.3 million barrels a day last month, down from 9.1 million barrels a day in February.
Oil traders are already nervous about high prices for petrol and other fuels, with US retail petrol prices nearing $US4 a gallon nationwide.
"The biggest thing is demand destruction," said Zachary Oxman, managing director at Trendmax Futures. "That's the biggest component in the sell-off."
