China devaluation sends oil to 6-year low

Beijing (Aug 11)  China’s decision to devalue the yuan sent the US oil benchmark tumbling Tuesday, settling at its lowest level in more than six years on worries over the health of the Chinese economy and the country’s appetite for crude.

Light, sweet crude futures for delivery in September CLU5, +0.19%  fell $1.88, or 4.2%, to finish at $43.08 a barrel on the New York Mercantile Exchange, its lowest settlement price since March 2009..

Brent crude LCOU5, -2.48% the global benchmark, fell $1.23, or 2.4%, to $49.18 a barrel on London’s ICE futures exchange.

China’s decision to devalue the yuan will make imports of a number of commodities including crude oil more expensive. It also raises worries about the strength of the economy of one of the world’s largest consumer of commodities.

“Traders are interpreting the yuan weakening as recognition by the Chinese government that economic growth is clearly under pressure and the extent of the slowdown could be more acute than the headline data is revealing. And when things aren’t going so well in the world’s second largest economy commodity prices get hit,” said Bob Shiring, energy analyst at Tradition Energy, in a note.

The yuan move raises the fear that China’s slowdown is accelerating and that the country’s government might be panicking, said Phil Flynn, senior market analyst at Price Futures Group. It also raises fears that other countries will respond with competitive devaluations of their own, he said.

The demand worries combine with supply fears, which have been the main driver behind a slump in oil prices.

The Organization of the Petroleum Exporting Countries on Tuesday said the group’s production rose to its highest level in more than three years. Members pumped 31.51 million barrels a day in July—a rise of 101,000 barrels a day over June to the highest level since May 2012. Read:OPEC pumps at 3-year high despite oversupply.

Oil demand is already at near seasonal peak levels and will fall from the second half of this year while excess supply may extend to the second half of this year as well as next year because of high output levels from OPEC members, a Morgan Stanley report said.

Over and above, Iran has signaled its intent to push up its output and increase international supplies as soon as sanctions are lifted.

Barnabas Gan, an economist with OCBC Bank, said investors will also be closely monitoring weekly U.S. crude oil inventory data. The American Petroleum Institute is due to report its weekly inventory figures later Tuesday, while more closely watched data from the Energy Information Administration is due on Wednesday.

Meanwhile, September gasoline futures RBU5, +0.11% fell 0.03 cent to $1.6937. September natural gas NGU15, +0.46%  rose 0.2 cent, or 0.1% to settle at $2.844 per million British thermal units.

Source: MarketWatch