Shanghai's Stock Slump Hits Oil Prices
BRIAN BASKIN
NEW YORK – Crude-oil futures fell below $70 a barrel Monday as a sharp drop in China's leading stock market triggered a global sell-off.
Light, sweet crude for October delivery recently traded $2.76, or 3.8%, lower at $69.98 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange traded $3.11, or 4.3%, lower at $69.68 a barrel.
Nymex crude is the latest market to fall in a wave that began in Asia with a nearly 7% drop in the Shanghai Composite Index. European equities followed, and the Dow Jones Industrial Average plunged by more than 1% immediately after opening. The Dow was recently at 9473, down 0.8%.
China's surging equities prices and strengthening economic indicators have provided major support for oil futures, hinting at the potential for rapidly growing developing economies to draw down global crude inventories.
But growth has come only with massive government support, and investors are beginning to doubt China's ability to maintain its expansion rate, or for other major economies to shake their own downturns. The Shanghai index has become increasingly volatile this month.
"Any cracks in Chinese armor are going to leak oil," said Phil Flynn, an analyst with PFGBest in Chicago. "The rebound in the Chinese stock market is where the oil rally really began."
Oil prices still haven't deviated far from a trading range between $70 and $75 a barrel that has held for most of August. High inventory levels are preventing a move higher, but optimism that the world economy is in recovery are cutting short any downward corrections.
Analysts expect more of the same this week, leading into the Labor Day holiday next Monday. The only major data due out this week are U.S. oil and refined product inventories on Wednesday, and jobs data on Friday.
"Trading ranges should widen and volume fall somewhat as the market approaches the last important holiday of the summer," wrote Mike Fitzpatrick, with MF Global. "Look for oil prices to keep covering the familiar ground that they have over the past several weeks."
Front-month September reformulated gasoline blendstock, or RBOB, recently traded 7.53 cents, or 3.7%, lower at $1.9865 a gallon. September heating oil traded 8.82 cents, or 4.7%, lower at $1.7721 a gallon. Both contracts expire at settlement.
