Oil prices were declining Thursday morning as European debt contagion fears reached new heights on talks that France could be the next country to lose its prime credit rating. The September Brent crude contract was tumbling $1.12 to $105.56 a barrel. West Texas Intermediate light sweet crude oil for September delivery were skittish, falling 39 cents to $82.50, but wavering back and forth between positive and negative territory throughout the morning.

"Focus has now shifted from Ireland and Greece and Portugal and Italy and Spain to now rest on France, and the fear that the current crisis is materially hurting the second largest country in the Euro," said Summit Energy analyst Matt Smith.

Rumors that France could lose its coveted AAA credit rating were spreading less than a week after the U.S. lost its prime credit rating with a landmark downgrade by Standard & Poor's. Given the rising market uncertainty, JBC Energy analysts have lowered their 2011 oil demand growth outlook by 150,000 barrels a day to 1.39 million barrels a day.

Their negative revision follows the International Energy Agency's warnings that it may have to more than halve its oil demand growth outlook for next year if global economic growth slows to 3%. The Labor Department reported on Thursday that initial jobless claims fell by a more-than-expected 7,000 to 395,000 last week; but this overlapped with news that the U.S. trade deficit had widened 4.4% in June to $53.1 billion.

U.S. exports saw their biggest decline during that period since Jan. 2009, falling 2.3% to $170.9 billion.

The wider than expected trade gap and big drop in exports "suggests a detraction from [second quarter] gros domestic product growth," commented CRT Capital Group analyst David Ader. Oil prices ended Wednesday's trading session firmly planted in positive territory after the U.S. Department of Energy revealed an unexpected draw of 5.2 million barrels in U.S. crude stocks last week. But Commerzbank commodity analysts say that the sharp decline should be treated with some caution given that the decline in crude oil imports and the rise in refinery utilization were not strong enough to explain the inventory reduction.

"Furthermore, a further 2.5 million barrels of crude were released from the strategic reserves, which do not show up in commercial stocks," the analysts noted.

Oil and gas stocks were trading in mixed territory. Chevron(CVX_) was rising 0.7% to $91.07; Exxon(XOM_) was adding 1.5% to $69.07; Anadarko Petroleum(APC_) was advancing 1.1% to $66.37; ConocoPhillips(COP_) was flat at $62.68; Kinder Morgan Energy Partners(KMP_) was falling 0.5% to $69.37; El Paso(EP_) was rising 1% to $17.76 and Southern Union(SUG_) was flat at $41.36. Read More