Oil prices drop as US spending cuts kick in

March 02, 2013 | 09:39

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World oil prices fell on Friday, with New York crude striking a two-month low point, as traders eyed huge US spending cuts due to take effect and weaker Chinese manufacturing data.

New York's main contract, West Texas Intermediate crude for delivery in April, sank as low as $90.04 a barrel -- the lowest level since late December, before recovering to close at $90.68, down $1.37 on Thursday's finish.

Brent North Sea crude for April fell 98 cents to settle at $110.40 a barrel in London trade.

Analysts blamed the steadily gaining dollar -- the euro dropped to below the $1.30 level momentarily Friday -- and the expected slowing of the US economy due to the steep sequester spending reductions set to kick in.

If not modified, the sequester -- $85 billion in spending cuts over the next seven months, and $110 billion from the fiscal 2014 budget -- could trim at least 0.5 percentage points from potential economic growth, economists say.

Also weighing on the market were more dismal data from Europe: the Markit Eurozone Manufacturing Purchasing Managers Index was 47.9 points in February, still in the contraction zone, and unemployment in the 17-nation bloc rose to a record 11.9 percent in January, with nearly 19 million people out of work.

Martin van Vliet at ING Bank said the data had marked a "sharp acceleration from December" and meant that "an end to the labor market downturn is not yet in sight.

"Even if the eurozone economy exits from recession in due course, the labor market is likely to remain in recession for most if not all of this year," van Vliet said.

Earlier in the day, China's manufacturing PMI fell in February to 50.1 points, barely in expansion territory and still a reason for concern over the pace of growth.