Oil Prices fall as China Share Crisis worsens, Traders hedge for further Drops

Oil futures fell again on Wednesday as worries over the Greek debt crisis and China’s stock market turmoil outweighed an expected U.S. inventory drop, with traders anticipating further drops.

China’s stocks tanked further on Wednesday in a deepening crisis in which China’s Securities Finance Corp said it would provide liquidity to ease “panic” as 45 percent of all China-listed firms have suspended trading.

Front-month Brent crude futures were 60 cents lower at $56.25 a barrel at 0657 GMT, and are down over 6 percent so far this week to levels last seen in April.

U.S. crude was down 59 cents at $51.74, down more than 8 percent for the week.

“A perfect storm of events has hit oil markets,” Morgan Stanley said.

The bank said “turmoil in China and Greece may put recent robust demand growth at risk,” although adding that moves so far had been largely on sentiment rather than new oil fundamentals.

Yet trade data showed that the market is preparing for further falls.

Open interest in options to sell U.S. crude at $50 per barrel has fallen almost 15 percent since the beginning of July, while those to sell at $45 a barrel have risen 12.5 percent.

“Funds are contributing to the sell-off, with (U.S.) speculators reducing net-long position in WTI oil by 8 percent in the latest week,” ANZ said.

China’s CSI300 index has lost a third of its value since June in the steepest downward correction since the global crisis in 2008, forcing China’s central bank to say it would support stability in the stock market and guard against systemic and regional financial risks.

“The stock market crash doesn’t bode well for the (Chinese) economy. If your stock market account is shredded, you won’t buy your white goods,” said Ed Meir at INTL FCStone.

HSBC on Wednesday cut its 2015 growth outlook for Asia excluding Japan to 6.3 percent from 6.5 percent.

“Things aren’t exactly going according to plan. The sharp drop in crude prices, policy easing and stabilizing demand … were supposed to give Asia a little breather over the last couple of quarters. Instead, local demand – whether construction in China, auto sales in Indonesia or real estate transactions in Taiwan – continues to slow,” it said.

“Asia’s export malaise is not just a temporary blip, but reflects longer-lasting structural factors, with a trade rebound unlikely.”

Greece’s debt crisis has also dragged on commodities. Creditors have given Athens until the end of the week to come up with reforms in return for loans that will keep the country from crashing out of the euro.

The oil price falls came despite an expected draw in U.S. inventories, which a Reuters poll flagged at 700,000 barrels, while the American Petroleum Institute (API) estimated an almost 960,000-barrel drop. Government data will be published on Wednesday.

Source: Reuters