Oil prices tumbled on Monday on heightened worries of an oil glut, putting pressure on energy shares and giving pause to global equity prices, which have rallied to their highest in nearly a year.
The US dollar recovered some ground against a basket of major currencies after its worst week in three months.
A 15-per cent slump in US crude prices in July, the worst monthly loss in a year, triggered liquidation as trading began for August and US crude fell below $40 per barrel for the first time since April.
“It's stop-loss technical selling combined with sheer liquidation by those fearing we'll soon be swimming in oil again,” said Phil Davis, trader at PSW Investments in San Diego, California.
Brent crude settled down $1.39, or 3.19 per cent, at $42.14 a barrel, while US crude settled down $1.54, or 3.70 per cent, at $40.06.
Lower oil prices hit energy shares and global equity prices pulled back a little after rising to the highest in nearly a year. MSCI’s world stocks index, which tracks shares in 45 nations, was down 0.14 per cent.
On Wall Street, the S&P 500 and the Dow fell slightly as energy stocks weighed. The S&P, which earlier in the session hit an intraday all-time high, has been on a record-setting rally - helped by mostly positive data and strong earnings.
“I think the interesting thing is that you are not seeing a huge reaction out of the stocks side of the equation,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management in Seattle.
“You are seeing much more of a reaction out of distressed companies in the energy space than you are out of the broader equities.”
The S&P 500 index has remained in a very tight range over the past 13 sessions and has struggled for direction.
“The economic data until last week had been pretty decent. But since the (US) GDP numbers came out, we’re seeing holes in the argument that the second half of the year is going to be better,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.
“At these valuations, the market is desperate for a catalyst to move higher.”
Growth in US gross domestic product in the second quarter came in below expectations on Friday, fuelling speculation that the Federal Reserve may not pull the trigger on raising interest rates anytime soon.
US manufacturing activity
Data on Monday showed US manufacturing activity slowed in July as orders fell broadly and construction spending dropped in June.
The Dow Jones industrial average fell 34.27 points, or 0.19 per cent, to 18,397.97, the S&P 500 lost 3.17 points, or 0.15 per cent, to 2,170.43 and the Nasdaq Composite added 21.62 points, or 0.42 per cent, to 5,183.75.
Europe's broad FTSEurofirst 300 index closed down 0.61 per cent at 1,339.15. Stocks were dragged down by banks such as UniCredit and Raiffeisen, which performed poorly in a Europe-wide stress tests.
Dollar index
In currency trading, the dollar index rebounded, helped by gains against the yen, which pulled back from three-week highs reached on Friday after the Bank of Japan eased policy less aggressively than expected.
The dollar index, which tracks the greenback against six major currencies, was up 0.23 per cent at 95.746.
In bond markets, US Treasury yields rose from Friday's multi-week lows on anticipation of a corporate bond offering from Microsoft, with profit-taking also fuelling the move.
US 10-year Treasuries prices were last down 11/32 to yield 1.4957 per cent, after touching a more than two-week low yield of 1.450 per cent on Friday.
Spot gold prices were up 0.17 per cent at $1,352.86 an ounce.