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China turmoil pushes oil closer to $30 a barrel

Jan 07 2016 08:58
Ben Sharples and Ann Koh

London - Turmoil in China’s markets is pushing oil closer to $30 a barrel.

Crude futures slid as much as 3.3% in London on concern the economic slowdown in the world’s biggest commodity consumer is worsening. China’s central bank on Thursday reduced the onshore yuan’s fixing to the lowest since March 2011, triggering a selloff that led to the closure of Chinese stock exchanges. Brent oil will slump to $30 in the next 10 days, according Nomura Holdings, while UBS Group sees an oversupply pushing prices even lower.

“The market trades on greed and fear, and right now fear dominates greed,” said Gordon Kwan, a Hong Kong-based analyst at Nomura. “Commodity futures markets are always forward looking, and they fear that the depreciation of the yuan foreshadows further weakness in the Chinese economy.”

Oil declined for a third year in 2015 as the Organisation of Petroleum Exporting Countries effectively abandoned output limits amid a global glut. Stockpiles at Cushing, Oklahoma, the delivery point for US benchmark crude, rose to a record while nationwide stockpiles remain about 100 million barrels above the five-year average, according to Energy Information Administration data.

Brent for February settlement dropped as much as $1.14 to $33.09 a barrel on the London-based ICE Futures Europe exchange and was at $33.36 at 11:54 Hong Kong time. The contract dropped $2.19 to $34.23 on Wednesday, the lowest close since June 2004. The European benchmark was at a premium of 22 cents to West Texas Intermediate.

Chinese demand

WTI for February delivery fell as much as $1.20 to $32.77 a barrel. The contract lost 8.3% the previous three days to close at $33.97 on Wednesday, the lowest since December 2008. Total volume traded was more than triple the 100-day average.

The global economy will sputter along this year as China’s slowdown prolongs a commodity slump, the World Bank said on Wednesday. The Washington-based development bank lowered its forecast for 2016 growth to 2.9% from a 3.3% projection in June, according to its bi-annual Global Economic Prospects report.

The People’s Bank of China reduced the yuan’s fixing by 0.51% to 6.5646, the weakest since March 2011 and a reminder of the August cut that sparked financial-market turmoil. Trading on the CSI 300 Index was suspended after it plunged more than 7%.

Cushing capacity

“Given that oil moved directly after the fixing, that would indicate Chinese demand is going to be hurt by the weaker currency,” Angus Nicholson, a market analyst at IG in Melbourne, said by phone.

“Every time they fix the midpoint, you see this immediate move into US dollar buying as the global currency market tries to re weight.”

Supplies at Cushing expanded for a ninth week, the longest run of gains since April, according to the EIA data released on Wednesday. The hub has a working capacity of 73 million barrels. Nationwide stockpiles declined by 5.1 million barrels to 482.3 million.

Spot prices for Western Canadian Select fell as low as $19.81 a barrel on Wednesday, the lowest since tracking began in 2008, according to data compiled by Bloomberg. Producers in Canada are being cushioned somewhat by the country’s weak currency, which has seen its value shrink along with crude. Most of the nation’s output is exported and companies are paid in US dollars.

“Clearly the economic concern is a factor but that doesn’t really explain everything,” said Dominic Schnider, head of commodities and Asia-Pacific foreign exchange at UBS’s wealth- management unit in Hong Kong.

 “There is a weak backdrop given that the market is oversupplied. If there is continued build in inventory, the market will not be pleased and if the market loses patience then the next step a bit below $30.”

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commodities  |  markets  |  oil

 
 
 
 

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