Oil Futures Drop Again on Renewed Fears About Euro Zone

U.S. oil futures tumbled sharply Thursday on renewed fears that this week's euro-zone summit would again fall short of resolving the crisis.

Nymex oil futures settled at $77.69 a barrel, down $2.52, or 3.1%.

The fall came as European leaders converged on Brussels for another summit to try to resolve that region's sovereign debt crisis. Germany's Finance Minister signaled somewhat greater willingness than before to endorse debt mutualization. At the same time, yields on Spanish and Italian bonds have risen in recent days.

"The overriding issue is renewed liquidation related to equity weakening and the apprehension over the euro," said Jim Ritterbusch, president of trading advisory firm Ritterbusch & Associates.

"While it remains possible that the European leadership will pull a rabbit out of their collective hat, market expectations remain low," Credit Suisse said in a note.

Oil prices typically track economic expectations because of the commodity's central role in industrial production. Oil prices have retreated some 25% in recent weeks as hopes have dimmed about a speedy economic recovery.

Oil prices were trading lower throughout Thursday's session, but they nose-dived especially after a long-awaited U.S. Supreme Court ruling that largely upheld President Barack Obama's health-care law. Analysts said the relationship between oil prices and the health care ruling was indirect in that oil prices retreated in response to the fall in equity markets after the ruling came down.

The S&P 500 Index was trading at 1315, down 1.3% at 2:50 pm EDT, after hitting an intraday low of 1313 earlier.

Analysts said the markets remain jittery over demand weakness. A report by the Federal Reserve Bank of Kansas City Thursday gave fresh evidence of manufacturing woes.

The Kansas City Fed's manufacturing composite index--an average of the indexes covering production, new orders, employment, delivery times and raw-materials inventories--fell to 3 in June from 9 in May.

"Concern over demand issues continues to overshadow these markets," said Andy Lebow, a commodities broker with Jefferies Bache. "The market may still have some downside here."

While also trading lower Thursday, WTI's sister commodity, Brent Futures, was outperforming the U.S. benchmark somewhat. Brent prices were at $91.67 Thursday, down $1.83. The Brent market has picked up some strength amid a strike of Norwegian oil workers that has so far taken about 250,000 barrels a day off line. A note by J.P. Morgan observed that the Norwegian government was unlikely to intervene in the strike. The strike could "act as a support for Brent market structure," J.P. Morgan added.

Front-month reformulated gasoline blendstock, or RBOB, settled at $2.614 a gallon, down 0.24%. Heating oil settled at $2.55 a gallon, down 1.6%.

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