Oil price drops to $119

Brent crude dropped on Friday to trade just above $119 a barrel on renewed fears about the state of the debt-ravaged euro zone economies following a downgrade of Spain's credit rating. But gains in the previous sessions, spurred by optimism the US Federal Reserve would do what it needs to ensure recovery in the world's top economy is on course, have put Brent on track for a rise this week after dropping in the last two. Standard & Poor's on Thursday lowered its credit rating on Spain by two notches to BBB-plus, citing expectations the government's finances will deteriorate even more than previously thought due to a shrinking economy and an ailing banking sector. Brent crude fell 55 cents to $119.37 a barrel by 9.33am UAE time, after rising in the past two sessions. US oil slipped 60 cents to $103.95 per barrel, on course for a second straight week of gains. "Last night's high failed to break the trendline at around $104.90, so this pullback is likely a sign of some profit-taking in addition to fundamentals," said Rich Spooner, chief market analyst at Sydney-based brokerage CMC Markets. While strong corporate earnings have been driving US equity markets higher, "other markets remain nervous over the euro zone economies and the Spain ratings downgrade is a reinforcement of that view", Spooner said. "Just take a look at the bond rates in Europe, they are elevated and it serves to remind us of the ongoing problems in Europe." German government bond prices rose on Thursday after weaker-than-expected business sentiment data revived worries that economic weakness could deepen the euro zone debt crisis. S&P, in its rating move on Spain, also put a negative outlook on the credit and said Madrid's situation could deteriorate further unless ambitious measures were taken at the European level. The risk premium on oil prices remained as indicated by a monthly Reuters poll of analysts which showed that Brent crude futures are expected to average $117.30 per barrel this year, $2.60 higher than in the March survey. The outlook was supported by ongoing production outages in the North Sea and the prospect of a European Union ban on Iranian oil imports, which takes effect on July 1. US crude was seen to average $105.60 for the year, $1 more than the previous month's projection, the poll showed. Developments over the standoff between Iran and Western nations continue to be on investors' radar, although fears that tensions would intensify seemed to have waned a bit. "The risk premium on Iran stays. I don't think people are going to back off on this, I'm not saying anything is going to happen, but this is far from being resolved," Spooner said. Iran is grappling with tough new sanctions by the United States and its allies because of its nuclear program which the West says is aimed at building an atomic bomb. Iran has vehemently denied this allegation, insisting its program is for civilian use.