Oil futures ticked lower Monday as U.S. lawmakers remained deadlocked over raising the U.S.'s borrowing limit ahead of an Aug. 2 deadline.
Light, sweet crude for September delivery settled down 67 cents, or 0.7%, to $99.20 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled down 73 cents, or 0.6%, to $117.94 a barrel.
Republican and Democratic leaders were formulating competing proposals over how to raise the U.S. government's borrowing limit ahead of their deadline after bipartisan talks collapsed over the weekend. After Aug. 2, the government won't be able to pay all of its bills and risks defaulting on some debts.
In the near term, a failure to raise the debt limit would likely cause investors to shed risky assets like commodities because of concerns it could hobble the economic recovery in the U.S., the world's largest crude consumer, analysts said. All three major credit rating agencies have threatened to cut their triple-A rating on U.S. debt, which could raise the cost of borrowing, if the debt ceiling isn't raised in time.
"If there's a default, it would impact crude as a risk-off trade," said Dominick Chirichella, analyst at the Energy Management Institute in New York.
Still, the modest nature of Monday's sell-off suggests that most market participants still believe lawmakers will find a solution, Chirichella said.
"In a default, they all lose," he said of lawmakers. "There are no winners."
Commodities and equities fell broadly Monday on the debt-ceiling concerns. Gold futures, which typically act as a safe-haven for investors during times of uncertainty, surged to a record high.
Monday's decline in crude prices highlights a shift in attention among crude traders back to the U.S., which has been of secondary concern to most market participants for much of 2011. Despite Monday's pull-back, Nymex crude prices are up 8.6% so far this year, driven largely by strong economic growth in emerging economies like China.
Still, the prospect of additional economic weakness in the U.S. remains a worry for many traders, while sovereign debt woes in Europe have also kept prices from returning to recent highs near $115 a barrel reached earlier this year.
The longer-term effect on crude prices of a failure to raise the debt ceiling is unclear. If it causes serious damage to the U.S. economy, it could weaken demand for crude and cause prices to continue to fall. At the same time, it could cause the dollar to weaken, either directly or by spurring the Federal Reserve to launch another round of monetary stimulus. A weaker dollar typically raises oil prices by making the commodity cheaper for holders of other currencies.
"If they fail to get a debt deal, I think its going to be very bullish for oil" in the longer term, said Phil Flynn, analyst at PFG Best in Chicago.
Front-month August reformulated gasoline blendstock, or RBOB, settled down 0.37 cent, or 0.1%, to $3.1264 a gallon. August heating oil settled down 2.02 cents, or 0.7%, to $3.1078 a gallon.