Oil ral­lies but still near 6-1/2-year lows


Oil bounced back from heavy losses on Tues­day but global over­sup­ply and wor­ries over the sever­ity of the eco­nomic slow­down in China, the world's top com­mod­ity con­sumer, kept prices near 6-1/2year lows.

Euro­pean eq­uity mar­kets re­cov­ered on Tues­day but Chi­nese stock mar­kets closed down more than 7 per­cent, with panic selling in­ten­si­fy­ing af­ter the flag­ship Shang­hai Com­pos­ite In­dex crashed through key sup­port at 3,000 points.

U.S. crude, also known at West Texas In­ter­me­di­ate or WTI, was up $1.10 at $39.34 a bar­rel by 0930 GMT, while Brent was up $1.20 at $43.89. "It all de­pends on the Euro­pean stock mar­ket," Com­merzbank oil an­a­lyst Carsten Fritsch told Reuters Global Oil Fo­rum. "If stocks fall fur­ther, oil will fol­low suit."

Oil prices dropped to their low­est since early 2009 on Mon­day and many an­a­lysts think mar­ket fun­da­men­tals will keep prices low, de­spite Tues­day's slight up­lift. "China's econ­omy con­tin­ues to slow and the (U.S.) Fed may still hike rates be­fore the end of the year. That puts fur­ther cracks into the two main growth pil­lars for the world econ­omy of re­cent years: Chi­nese de­mand (in­clud­ing com­modi­ties) and easy money," HSBC's co­head of Asian Eco­nom­ics Re­search Fred­eric Neu­mann said. But he said a re­run of Asia's fi­nan­cial cri­sis in the late 1990s was un­likely.

Daniel Ang at Sin­ga­pore's Phillip Fu­tures said the re­bound for oil could be tem­po­rary: "Both WTI and Brent look like they are on their way to 2008 lev­els where prices hit a low of $32.4 and $36.2," Ang said. Ship­ping sources said a slow­down in de­mand was be­com­ing vis­i­ble in tanker traf­fic, where the num­ber of very large crude car­ri­ers (VLCCs) fixed to ar­rive in Asia fell from 105 in June to 94 in July and 83 this month.

Gold­man Sachs said that while China's tur­moil would not lead to a global re­ces­sion, it did ex­pect the trou­ble to re­sult in weak com­modi­ties. Be­yond Asia's tur­moil, oil mar­kets have been suf­fer­ing from over­sup­ply that started pulling down prices in June 2014. The Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries is pro­duc­ing record vol­umes to squeeze out com­pe­ti­tion, es­pe­cially from U.S. shale pro­duc­ers which have so far been re­silient to price plunges and kept pump­ing oil.

Some OPEC mem­bers have called for an emer­gency meet­ing to dis­cuss out­put cuts, but the or­gan­i­sa­tion's big­gest oil pro­ducer Saudi Ara­bia looks un­likely to let this hap­pen.

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