New York's main contract, West Texas Intermediate light sweet crude for September delivery, sank USD 1.08 to USD 98.79 a barrel, and Brent North Sea crude -- also for September delivery -- dropped 60 cents to USD 118.07.
"The uncertainty over the US debt saga has created concerns for the oil market," said Victor Shum, an analyst with energy consultancy Purvin and Gertz.
"If it defaults, it impacts potentially economic growth in the US and so it's a sort of a domino impact," he told AFP.
The White House and top lawmakers scrambled yesterday for a deal to stop the world's richest country from an unthinkable and ruinous default on its debt, which would affect the rest of the world.
Obama, his Democratic allies and Republican foes gave little sign of progress toward a compromise to raise the USD 14.3 trillion limit on borrowing by the US government, which will run out of cash to pay its bills on August 2.
"We still have a week to go -- there will be more political theatre before the deadline," said Shum.
"So we will likely see a lot of volatility in equities and oil futures this week," he said.
All sides agree that cash-strapped Washington must close its yawning budget deficit, but they disagree on the size and blend of spending cuts and revenue increases, as well as on how and whether to slice into the social safety net.