Oil prices under fresh pressure as China continues to spook the market

London (Jan 11)  Oil prices started the week in bear mode, with continued concerns over China buffeting the market on Monday.

Brent, the global crude benchmark LCOG6, -2.03%  , was down 2.09% at $33.23 a barrel on London’s ICE Futures Europe, while West Texas Intermediate CLG6, -1.75%  was 1.81% lower at $32.57 a barrel for February deliveries.

Concerns over China’s economic activity continue to weigh heavily on sentiment after such fears helped Brent crude fall over 10% last week and to levels not seen since 2004.

“The global glut issue has been around for a while. Right now, it is the fear of a Chinese slowdown that is spooking the market,” said Barnabas Gan, a commodity analyst at OCBC. “Most of the selling is based on emotions and panic,” he added.

ANZ said concerns over the impact of a depreciating Chinese currency will keep pressuring commodity prices lower in the short term.

China market misery deepens

China shares fell sharply again Monday as investors are losing faith in the Chinese government's ability to handle the current stock market turmoil there.

Most analysts agree a price recovery is still a long way away but the more bullish ones believe prices are stabilizing amid signs of shrinking production.

According to industry group Baker Hughes, the U.S. oil-rig count, which is viewed as a proxy for drilling activity, fell by 20 to 516 in the latest week.

“The strong jobs data from the U.S. last week should help keep the prices from bleeding further,” said Daniel Ang, a Phillip Futures energy analyst, but noted a stronger dollar would also impede a rebound in crude prices.

Cues this week

This week, traders will be taking their cues from the weekly U.S. crude inventory and production data and China’s December trade data. Both will be released on Wednesday.

Prices are also being weighed by fears that the escalating tension in the Middle East will deter oil producers from cutting production.

Read: First profit fall in 48 years looms over energy sector

Still, not all market players are convinced that China is the primary driver of low prices.

Michael Nielsen, senior derivatives trader at the Copenhagen-based oil traders Global Risk Management, said the decision by the U.S. Federal Reserve to raise interest rates in December is pushing crude lower.

“The real problem is that the Fed raised rates in an economy that was not ready for it,” he said. “The manufacturing figures coming out of the U.S. are horrible and they would never usually raise rates if this data was so bad. The economy is not ready for it.”

Nielsen said that prices have a chance of recovering to $36 a barrel, but there is still a chance that the lows of last week could be revisited.

Risk aversion remains high in this market. Commerzbank said in a research note that the sale of long-term oil contracts, known as net long positions, are at the lowest level since the global economic crisis of 2009. There are only 49,400 contracts being held on the week ending Jan. 5, a drop of 24,300 on the previous week, the bank said.

Source: Reuters