Oil prices drop to three-month lows on China worries

on Jul 8, 2015
Updated: Feb 27, 2024
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Oil prices extended the recent bearish run today, falling to new three-month lows as “a perfect storm of events” (as described by Morgan Stanley) hit markets. China, Iran and Greece all contributed to the biggest daily retreat for crude since early April.

WTI futures for August delivery on the New York Mercantile Exchange had slipped 0.78 percent to $51.92 per barrel as of 09:14 BST today, while Brent on the ICE in London was down 1.19 percent to $56.17. Both contracts have lost nearly 15 percent over the past two weeks, reaching three-month lows yesterday.
“Prices are getting hit from all angles, we see very little optimism in the oil-futures market,” Gordon Kwan, head of regional oil and gas research at Nomura Holdings Inc. in Hong-Kong, said as quoted by Bloomberg. “It will persist for at least the next two weeks until we see a visible return of confidence in China’s financial markets.”
The heaviest headwind for crude in recent days has been the dramatic nosedive of the Chinese equities market. The Shanghai Composite index has now lost more than 35 percent since the June 11 high, prompting authorities to take actions. The government’s intervention saw a collective of funds agreeing to spend hundreds of billions of yuan on buying stocks in a bid to halt the slide, while new listings were suspended to prevent investment dilution.
The measures were seen as highly controversial and authoritative, but more importantly, few analysts were confident that they would succeed in halting the retreat.
Indeed, the Shanghai Composite Index had slid 5.91 percent to close at 3,507.19 points today.
“The market is now falling on the assumption that both China’s economy and financial markets face systemic risk,” Wang Zheng, chief investment officer at Jingxi Investment Management Co., said as quoted by Bloomberg. “If the decline is left as it is now… That’ll for sure jeopardize the real economy.”
Investors were also keenly monitoring the talks between Iran and six world powers. The negotiations were subject to a deadline which was extended to July 10, as a deal seemed “closer than ever,” delegates said. A positive resolution could allow Iran to ramp up exports by as much as 1m barrels per day in a years’ time, increasing the level of oversupply an already saturated oil market.
Meanwhile, Greece’s woes continued to underpin economic growth and oil demand projections for Europe. The EU has set a deadline of Thursday for Athens to come up with new proposals or face a catastrophic collapse of public services and the banking sector as cash runs out.
Finally, the US Energy Information Administration (EIA) is due to release its weekly oil report later today. Analysts expect oil inventories to have dropped by 0.7 million barrels. Last week, crude oil stocks saw the first build in nine weeks, though levels are still seen as excessively high (17 percent higher on an annual basis).
The EIA’s short-term energy outlook, released yesterday, expects US production to fall off recent record highs in the coming months, and to continue falling through early 2016.
US output has peaked of late, despite the 50 percent decrease in the number of active rigs, as the “shale revolution” has begun reshaping the industry.

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