The price of oil fell sharply on Monday, to below $102 a barrel, amid concerns that U.S. political leaders might not be able to reach a deal on a federal budget needed to avoid a partial shutdown of the government.
By early afternoon in Europe, the benchmark oil contract for November delivery was down $1.36 to $101.51 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 16 cents to close at $102.87 a barrel on Friday.
The U.S. government will reach its borrowing limit, or debt ceiling, on Tuesday. If Congress doesn't raise that limit, the government won't be able to pay all its bills and some 800,000 of the 2.1 million federal employees will not go to work.
A lasting solution seems far off as the White House and Republican lawmakers still disagree sharply on spending cuts and other key budget issues.
"The economy will slow down, confidence will slide and demand for crude will be hurt," said Evan Lucas, analyst with IG in Melbourne. "There will be a real snowball effect if the partial shutdown goes ahead."
Goldman Sachs estimated that a three-week shutdown would slow the economy's annual growth rate in the October-December quarter by up to 0.9 percentage points. If so, the growth rate next quarter would be a scant 1.6 percent, compared with market expectations of a 2.5 percent growth.
Political uncertainty also surfaced in Italy, where Prime Minister Enrico Letta will face a confidence vote on Wednesday after ministers from Silvio Berlusconi's center-right bloc pulled out of the five-month government. Markets are concerned that key economic reforms will not be implemented if the government falls.
After climbing to over $110 in late August, the price of oil has been mostly falling for three straight weeks as diplomatic efforts surrounding Syria and Iran eased concerns about Middle East supplies.
"Political crises in Italy and the U.S. mean risk is off the menu, while receding geopolitical concerns in the Middle East and excess supply are also weighing on the price of oil," said Fawad Razaqzada, an analyst at GFT Markets in London.
Brent crude, the benchmark for international crudes used by many U.S. refineries, was down 77 cents to $107.86 a barrel on the ICE Futures exchange in London.
In other energy futures trading on Nymex:
-- Wholesale gasoline fell 2.15 cents to $2.6387 per gallon.
-- Natural gas lost 4.4 cents to $3.545 per 1,000 cubic feet.
-- Heating oil retreated 1.68 cents to $2.968 per gallon.
Eileen Ng in Kuala Lumpur, Malaysia, contributed to this report.
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