UPDATE 8-Oil drops $1 as Spain downgrade weighs on markets

                                
 * Fitch downgrade of Spain credit rating weighs on markets
                                
 * Midwest business barometer slips weighs on equities, oil
                                
 * Coming up: ISM manufacturing index, June 1, 10 a.m. EDT
                                
 (Releads, updates prices)  
                                
 By Robert Gibbons
                                
 NEW YORK, May 28 (Reuters) - U.S. crude oil futures fell
sharply on Friday after a downgrade of Spain's credit ratings
and disappointing U.S. economic data made investors more
cautious on a range of riskier assets.
                                
 Oil was already in retreat from a two-week high above $75
per barrel on disappointing U.S. economic data.
                                
 Fitch Ratings downgraded Spain's credit ratings by one
notch on Friday, saying the country's economic recovery will be
"more muted" than government forecasts due to austerity
measures. [ID:nWNA2365]
                                
 "Oil futures are down a lot and it's all because of the
news of Fitch downgrading Spain's credit rating. Ahead of the
long weekend, crude futures have latched on to the stock market
which is falling on euro-zone worries," said Mark Waggoner,
president at Excel Futures in Bend, Oregon.
                                
 U.S. crude futures for July delivery <CLc1> at 2 p.m. EDT
(1600 GMT) were down $1 at $73.55 a barrel, having fallen as
low as $73.18 (73.13?) after reaching an early $75.72 high.
                                
 London's ICE Brent crude <LCOc1> was down $1.10 at $73.56.
                                
 Oil markets had already expected some volatility with the
U.S. June refined products futures contract heading for expiry
on Friday.
                                
 U.S. stocks fell 1 percent, extending earlier losses after
Spain's credit rating downgrade put euro-zone debt issues back
into focus. [.N]
                                
 The euro fell across the board after the downgrade. [USD/]
                                
 U.S. consumer spending was unexpectedly flat in April, even
though real disposable incomes had their biggest increase in
nearly a year, the Commerce Department said. [ID:nN28167458]
                                
 The Institute for Supply Management-Chicago said its index
of Midwest business activity fell in May. Business activity
grew less than expected as employment declined.
[ID:nN28179473]
                                
 U.S. consumer sentiment rose slightly in May from April but
stayed near levels reported since February, while the one-year
inflation expectations climbed to the highest since October
2008, a Thomson Reuters/University of Michigan's Surveys of
Consumers report said. [ID:nN28181156]
                                
 Earlier on Friday, crude futures were up sharply as global
equities rose a third consecutive day and the euro edged up.
                                
 Oil prices have been extremely volatile in May. U.S. crude
hit an intraday low of $64.24 on May 20 ahead of the expiry of
the June futures contract, almost $23 below its peak at $87.15
on May 3, its level highest for 19 months.
                                
 This volatility has left investors cautious, though some
oil traders argue the market may have found a floor.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic of U.S. crude oil futures benchmark over the last year:
http://link.reuters.com/nuv86k
Graphic of crude vs euro/dollar:http://link.reuters.com/duw86k
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>    A Reuters survey on Friday showed the Organization of the
Petroleum Exporting Countries's oil supply up in May to the
highest in 17 months, suggesting a price slide has yet to spur
closer adherence to agreed output targets. [ID:nWLA5200]
                                
 Traders are keeping an eye on forecasts for the Atlantic
hurricane season that have revived concerns of disruption to
supplies in the Gulf of Mexico, where BP's <BP.L> attempt to
plug a gushing oil well continued.
                                
 In its first outlook for the Atlantic hurricane season that
begins on June 1, the U.S. National Oceanic and Atmospheric
Administration forecast 14 to 23 named storms, with eight to 14
hurricanes, nearly matching 2005's record 15. [ID:nN2798815]
                                
 Hurricanes Katrina and Rita devastated offshore oilfields
and refineries on the Gulf Coast in 2005, causing the most
severe disruption to U.S. supplies from a natural disaster.
                                
 The coming Memorial Day weekend is the traditional start of
the U.S. summer driving season, when motor fuel demand usually
increases.
                                
 U.S. diesel fuel demand for trucking and industry is
rising, a weekly government report showed on Wednesday.
                                
 Oil demand in the U.S. climbed almost 7 percent over the
past four weeks, the U.S. Energy Information Administration
said, led by a 16 percent jump in demand for distillates, a
category that includes diesel fuel and heating oil.
 (Additional reporting by Gene Ramos in New York, Christopher
Johnson in London and Alejandro Barbajosa in Singapore; Editing
by Sofina Mirza-Reid)