Oil prices rebound as China stocks battle back

London (Jan 8)  Oil prices were in recovery mode on Friday as the Chinese stock market rose and investors hunted for bargains after this week’s selloff.

Crude plunged to a more than a decade low on Thursday after the Chinese government allowed the yuan to fall faster than anticipated. The move triggered a rapid stock selloff in China that rattled global markets and fueled fears on the oil market about the health of the world’s second-biggest oil consumer.

“Oil prices moved away from intraday lows just shy of $32 yesterday as Chinese equity markets seem to recover after a turbulent start of the year,” said Michael Poulsen, oil analyst at Global Risk Management. “But the rise is still fragile and unless the increase holds all day, prices could test $30 short-term.”

West Texas Intermediate futures CLG6, +1.38%  were trading up 0.8% at $33.52 a barrel. Brent crude LCOG6, +1.63%  , the global oil benchmark, rose 0.9% to $34.06 a barrel.

Both oil benchmarks had been up more than 1% earlier Friday.

Chinese stocks make a U-turn

Chinese stock markets recovered Friday after a tumultuous week. But the WSJ's Andrew Peaple explains why few expect the relative calm to last.

Chinese stocks rose and the yuan CNYUSD, +0.0683% strengthened Friday after authorities overnight removed a circuit breaker mechanism blamed for triggering more volatility.

The Shanghai Composite Index SHCOMP, +1.97%  finished up 2% at 3,186.41, recovering from a 7% plunge Thursday. It finished down 10% for the week, its worst performance since the week finished Aug. 21.

Still, investors continue to be concerned about Chinese oil demand given the market turbulence and weak economic data coming out of the Asian giant.

In the past year, Chinese demand has held up as the government and local refiners took advantage of cheaper oil. But Chinese oil data are finally starting to reflect weak economic activity. Implied oil demand in China contracted 4.9% over the month and 2% over the year in November, the first decline since July 2014, according to Barclays.

On Friday, traders will also be monitoring the upcoming U.S. jobs data release and the weekly oil rig count.

The number of U.S. oil-drilling rigs, which is viewed as a proxy for activity in the oil industry, has fallen sharply since oil prices started falling last year. But it hasn’t yet been enough to relieve the global crude glut. Baker Hughes Inc. will release the latest numbers later in the session.

Oil prices were also under pressure this week amid rising tension between Saudi Arabia and Iran. The escalating rift between the two key oil producers further damps any chance of a collaborative effort to cut global output, the main driver behind the current glut.

The glut is expected to expand more as Iran is prepared to make a full return to the oil market in coming months despite its deepened fissures with the kingdom.

That leads an increasing number of analysts and investors to predict that oil prices could fall below $30 a barrel in the short term before recovering later in the year.

Saudi Arabia’s state-owned oil company Saudi Aramco confirmed on Friday it’s considering listing the company on the capital markets through an initial public offering. An IPO had been seen as in the offing as the country tries to balance its budget amid steep losses in oil prices.

Source: MarketWatch