Oil Futures Settle Lower on China Fears

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled sharply lower Monday afternoon, with the West Texas Intermediate crude contract down to its lowest price point since December 2003 amid deepening worries over the consequences of China's economic slowdown.

"The oil market continues to react negatively to the sell-off in Chinese equities along with the expectation that Iranian oil will return to the market in the next few weeks," said Andy Lipow, president of Lipow Oil Associates in Houston.

Others agreed.

"It was a combination of issues that caused this selloff for oil," said oil analyst Phil Flynn. "Apart from China, oil prices collapsed after the U.S. stock [market] turned negative. The winter is also mild."

NYMEX February WTI crude contract dropped $1.75 to a $31.41 per barrel (bbl) settlement, a 12-year low of $30.88 bbl. The ICE February Brent futures contract declined $2.00 to $31.55 bbl at settlement, off a fresh 12-year low at $31.20.

In products trade, NYMEX February ULSD futures slumped 3.72 cents to $1.0149 gallon at settlement, off a $1.0066 gallon new 11-1/2 year low on the spot continuation chart. February RBOB futures settled 1.47 cents lower at $1.1130 gallon, off a fresh seven-year spot low at $1.1009.

The market initially fell after overnight data from China showed inflation running below a 3% target, with the consumer price index rising only 0.5% in December.

Analysts said China's stock market is overheated and may be overvalued, which is why investors are bailing out, pressing the Shanghai Index down more than 5% Monday after a loss of 10% on the first week of 2016. The index is down about 40% from its peak last July.

The latest turmoil has also been exacerbated by concerns China is distorting its data on economic growth. The official data targets China's economic growth at 6.5% in 2016, but analysts think the figure could be 2.4%, which would stifle demand at a time oil supply continues to increase.

"While there's a supply overhang weighing down oil prices, for us the biggest equation now is demand," said Jason Schenker, president of Prestige Economics in Houston. "This is a real concern because Chinese manufacturing sector is already in recession and the U.S. also could be in recession by 2017."

Other analysts said bear market sentiment and technical factors weighed down oil prices, with five investment banks downgrading their outlook for oil prices. Morgan Stanley projected the price of Brent and WTI falling to $20 bbl this year, although most of the banks see prices in the mid-$30s bbl.

Traders are now looking ahead to weekly U.S. crude oil inventory and production data set for release on Wednesday by the U.S. Energy Information Administration with data from the American Petroleum Institute set for release late Tuesday. The data is expected to show a build in domestic crude stocks, analysts said.

Meantime, Iran is expected to boost its oil supply once sanctions on Tehran are lifted, pursuant to the July 2015 nuclear agreement with world powers.

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