UPDATE 10-Oil drops on S&P U.S. outlook cut, demand worry

                                
 * S&P revises U.S. ratings outlook from stable to negative
                                
 * Saudi confirms output cut, says market well supplied
                                
 * Coming up: U.S. May crude contract expiry on Tuesday
 (Recasts, adds analyst comment, details and broad fall across
commodities markets)
                                
 By Robert Gibbons
                                
 NEW YORK, April 18 (Reuters) - Oil fell nearly $3 a barrel
on Monday after ratings agency S&P cut its U.S. credit outlook
to negative and top exporter Saudi Arabia said an oversupplied
crude market had forced it to reduce output.
                                
 Although it affirmed the United States' credit rating,
Standard & Poor's said there was a risk policymakers may not
reach agreement on how to address the country's long-term
fiscal pressures. [ID:nN18195555]
                                
 "The U.S. debt situation got a reality check this morning
from the move by S&P," said John Kilduff, partner at Again
Capital in New York. "Only precious metals will be seen as
attractive in the aftermath of the outlook downgrade."
                                
 OPEC member Saudi Arabia on Sunday confirmed it had cut
output by more than 800,000 barrels per day in March because of
weaker demand for its crude. [ID:nLDE73H03G]
                                
 Saudi Oil Minister Ali al-Naimi said a global economic
recovery remained "patchy", while his Kuwaiti counterpart added
that high oil prices threaten to become an economic burden for
many big consuming countries. [ID:nLDE73H03G]
                                
 Brent crude for June <LCOc1> fell $2.37 to $121.08 a barrel
as of 12:24 p.m. (1624 GMT), clawing back from losses of $3.
                                
 U.S. crude <CLc1> for May fell $2.93 to $106.73, having
slipped as low as $106.54. The U.S. May crude contract expires
on Tuesday.
                                
 U.S. equities tumbled as the S&P action added to concerns
about the world's top economy. [.N] Equities and oil also felt
pressure from another Chinese bank reserve hike over the
weekend, the latest move to control inflation that could curb
demand growth. [ID:nL3E7FH05Y]
                                
 Most commodities fell, hit by the S&P action and concerns
over Chinese demand. The 19-commodity Reuters-Jefferies CRB
index <.CRB> lost 1.2 percent, its most in a week. One
exception was gold -- seen as a store of value -- which shot to
a record near $1,500 an ounce. [COM/WRAP] [MET/L]
                                
 S&P said its outlook move signals a 1-in-3 chance it could
cut its long-term credit rating on the United States within two
years.
                                
 "This new warning, this time from S&P, highlights the need
for the U.S. to take better control of its fiscal destiny if it
is to avoid higher borrowing costs and maintain its central
role at the core of the global economy," Mohamed El-Erian,
chief executive at Pimco, which oversees $1.2 trillion in
assets, told Reuters.
                                
 WIDENING DEMAND CONCERNS
                                
 Oil investors also expressed worries over China's economic
growth after the Asian powerhouse raised banks' required
reserves on Sunday, to 20.5 percent for the biggest banks.
                                
 China's action was to fight excessive liquidity and
stubbornly high inflation in the world's second-largest
economy.
                                
 Crude fell early last week after Goldman Sachs <GS.N> and
other key forecasters warned high oil prices were eroding
demand. It rebounded late in the week on encouraging U.S.
economic data and a steep fall in U.S. gasoline inventories.
                                
 Euro zone debt woes kept broad pressure on the euro on
Monday, amid increased talk that Greece will be forced to
restructure its debt and uncertainty over a bailout for
Portugal, only paring losses after the S&P decision. [USD/]
                                
 The dollar index <.DXY>, measuring the greenback against a
basket of currencies, remained stronger even after the S&P
action.
                                
 A stronger dollar can pressure oil prices by making
dollar-denominated crude more expensive for consumers using
other currencies and by drawing investment to foreign exchange
markets for better returns.
                                
 SUPPLY THREATS REMAIN
                                
 Though investor focus turned back to demand and prospects
for economic growth, the threats to oil supply that helped
spark prices to recent, 32-month peaks have not disappeared.
                                
 Forces loyal to Muammar Gaddafi bombarded Misrata, Libya's
third-largest city, and a chartered ship evacuated nearly 1,000
foreign workers and wounded Libyans. [ID:nLDE73G0JB]
                                
 Clashes broke out in Yemen, wounding at least 15 people,
and thousands demanded the overthrow of Syrian President Bashar
al-Assad in escalating unrest. [ID:nLDE73H11R] [ID:nLDE73H0QJ]
                                
 Oil investors also eyed Nigeria, where rioting took place
in northern cities after a contentious election, according to
the Nigerian Red Cross. [ID:nLDE73H1M2]
 (Additional reporting by Claire Milhench and Alex Lawler in
London and Francis Kan in Singapore; Editing by Dale Hudson)