Oil Lower on China Growth Concerns

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled lower Monday afternoon after coming under sustained pressure from concerns about economic growth in China that could curtail demand.

A glut of oil supply also added to the NYMEX oil futures selloff although losses were limited by a weaker dollar, economic optimism and expectations a crude stock draw in the United States occurred last week.

The selloff started in China, where the Shanghai composite index plummeted 8.5%, the biggest one-day decline in eight years, as risk-averse investors worried government intervention that boosted equities over the past three weeks was unsustainable.

The stock market is a barometer for investor confidence and the rout in China rippled throughout the global markets, raising concerns about a slowdown in oil demand growth in the world’s second-largest economy and consuming nation.

“The Chinese stock market was the trigger for the [oil] losses because it raises concerns we could see demand destruction,” said analyst Phil Flynn at Price Futures. “The market is worried about growth.”

At settlement, NYMEX September crude futures were down 75 cents to $47.39 bbl and near a fresh four-month spot low of $47.20. ICE September Brent futures dropped $1.15 to $53.47 bbl and near a 4-1/2 month spot low at $53.21 bbl. The Brent premium over WTI narrowed 40cts to $6.08 bbl.

In products trade, the NYMEX August ULSD contract was down 3.46 cents at $1.5956 gallon, off a 6-1/2 month spot low at $1.5909. NYMEX August RBOB futures were down 0.78 cents at $1.8204 gallon, off a 3-1/2 month spot low at $1.8033.

ICE Brent and NYMEX oil futures registered fresh lows Monday afternoon in trading since settlement.

On Wall Street, U.S. equities were down for the fifth straight day, with the dollar index falling to a two-week low versus the euro and five other foreign currencies after the Info Institute's latest data showed business confidence in Germany improved as the Greek debt crisis eased.

The dollar pared losses after the Commerce Department reported durable goods in the United States rose a more-than-expected 3.4% in June from May due to strong demand for aircraft.

The Federal Open Market Committee, which meets Tuesday and Wednesday, is expected to delay raising interest rates until later this year, with more analysts expecting a September rate hike. The Bureau of Economic Analysis will release its advanced estimate of U.S. Gross Domestic Production for the second quarter on Thursday.

NYMEX WTI crude futures, which entered a bear market last week after falling more than 20% since their peak on May 6, faces more headwinds in the second half of the year, analysts said.

Analysts pointed to a continued global oil supply glut and the unexpected rise in the number of U.S. oil rigs operating last week, suggesting oil shale drillers aren't capitulating in the face of low oil prices as bearish features.

An early survey of analysts showed weekly U.S. crude oil stocks are expected to have been drawn down by 2.0 million bbl for the week-ended July 24 after a 2.5 million bbl stock build a week prior. Gasoline stocks are expected to have posted a build of 750,000 bbl while distillate supplies are expected to have increased by 1.25 million bbl for the week.

The American Petroleum Institute will issue its weekly data Tuesday afternoon while the Energy Information Administration's weekly data will be released Wednesday.

EIA last week reported that total domestic crude stocks at 463.9 million bbl for the week-ended July 17, up 25% year on year.

Overseas, the Iran nuclear deal signed two weeks ago would allow Tehran to increase its oil exports. Iran is expected to boost exports by as much as 1.0 million bpd from current level by next year, pressing down Brent futures.

George Orwel can be reached at george.orwel@telventdtn.com