Oil Prices Slump on China Growth Outlook

NEW YORK (TheStreet) -- Oil prices were slumping Wednesday morning on concerns of slowing economic growth in China and significant strengthening of the dollar on eurozone fears.

Brent crude oil for August delivery was falling $1.05 to $112.56 a barrel, while West Texas Intermediate (WTI) light sweet crude oil for August delivery was lower by 37 cents at $96.52. The weakening prices followed an oil price rally in the previous session, where a bullish oil forecast pushed prices above a key technical level and prompted a bout of technical buying.

"This morning crude is having a more logical price move than it did yesterday, and is selling off as China raised interest rates overnight for a third time this year," Summit Energy analyst Matt Smith said in a client note. "This is spurring on risk aversion, as although these rate increases will have the likely desired effect of curbing inflation, they will also work to slow economic growth in China, and hence oil demand going forward." China's is the world's largest energy consumer.

"Add to this a flight from the euro after Portugal was downgraded by Moody's to junk status yesterday, and crude is being pressured lower today."

The most widely-traded currency, the U.S. dollar, was stronger by 0.6% at $75.04. A weaker dollar encourages investors to buy oil, which is largely a U.S. dollar-based commodity, while a stronger dollar is seen to have the opposite effect. The euro was falling 0.9% against its U.S. counterpart at $1.4302.

The August natural gas contract was slumping by 1.2% to $4.313 per million British thermal units, planted between the $4.20 to $4.40 range that it's been trading in for the last several weeks. According to Smith of Summit Energy, the forecast of above-normal temperatures across much of the eastern half of the U.S. and particularly hot weather in the Midwest through mid-July remains supportive of natural gas, as this should be accompanied by greater air-conditioning needs.

But in addressing concerns about possible disruptions to natural gas operations in the Gulf of Mexico during this hurricane season, Smith says, "there is nil/nada/nothing on the hurricane front, while tomorrow's storage number looks set to replicate last week's print."

Also weighing on the markets Wednesday morning was a report from The Institute for Supply Management that said activity within the services sector slipped in June. The ISM's non-manufacturing index fell to a reading of 53.3, from May's level of 54.6. The market had been looking for a stronger reading of 54 in June, according to Briefing.com.

Oil and gas companies were trading mixed. Shares of independent petroleum company Tesoro (TSO) were popping by 3% to $23.82 after being raised to overweight from equal weight at Barclays Capital and Exxon (XOM) was down 0.9% to $80.91 after U.S. federal documents revealed that the oil major took twice as long than it initially claimed to completely seal a burst pipeline that spilled tens of thousands of gallons of oil into the Yellowstone River in Montana.

Devon Energy (DVN) was slumping by 1.2% at $78.86 and SandRidge Energy (SD) was behind by 1.7% at $10.70.

-- Written by Andrea Tse in New York.



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