Oil Drops to Four-Month Low Amid China Rout, Supply Glut

Reuters

Oil hit four-month lows on Monday after a steep drop in Chinese stock markets spread concerns about the economic health of the world's biggest energy consumer and more evidence emerged of a global supply glut.

Chinese stocks tumbled more than 8 percent on Monday, the biggest one-day drop in eight years which later in the day led European equities markets to a two-week low.

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"Today's oil price fall has been driven by the slump in Chinese stock markets," said Carsten Fritsch, senior oil market analyst at Commerzbank in Frankfurt.

Front-month Brent crude fell to an intraday low of $53.33 a barrel, its lowest in more than four months and down $1.29 on the previous close.

It last traded at $53.65, down 97 cents, at 1430 GMT. On Friday, Brent closed at $54.62, its lowest finish since March 19.

U.S. crude for September was down 96 cents at $47.68 a barrel.

China is the world's biggest energy consumer. Investors worry that a stock market crash could destabilize the Chinese economy and cut fuel demand.

Global oil supplies are ample, with major oil producers in the Middle East Gulf competing for market share and pumping 2-3 percent more oil than needed, analysts say.

Oil market speculators have also cut their bets on a longer-term rise in oil prices, InterContinental Exchange data showed. Hedge funds and money managers cut their net long positions on Brent futures for the first time in four weeks in the week to July 21.

In a further sign of good supply, weekly U.S. drilling rig data showed on Friday that 21 oil rigs had been added, the highest gain since April 2014.

In Iraq, exports from its southern oilfields are on course for a monthly record, having topped 3 million barrels per day so far this month.

"In the next couple of months, even if the global oversupply and seasonal weakness are becoming priced in, it is difficult to see where any price uplift will come from," said Societe Generale oil analyst Michael Wittner.

Investors were also looking to the U.S. Federal Reserve for direction this week. The central bank on Tuesday starts a two-day policy meeting, which could result in a September interest rate increase that would strengthen the dollar.

"There is scope for the dollar bulls to be disappointed this week (which) might be a driver for oil prices and the commodities complex overall," said Ben Le Brun, market analyst at Sydney's OptionsXpress.

A weaker dollar makes dollar-denominated commodities, including oil, cheaper for consumers using other currencies. (Additional reporting by Keith Wallis in Singapore; Editing by Dale Hudson and William Hardy)