Oil falls on weak China demand

Oil fell as much as 4% yesterday after China devalued its currency, raising questions about its demand for crude, while a new projection showed non-Opec producers were more resilient than expected to keeping output high amid low prices.

US crude hit contract lows, trading about $1 above its bottom for 2015. Brent, the global benchmark, lost most gains from a Monday rally, heading for its largest decline in a week.

Opec projected that oil supplies from countries outside the group will rise by 90,000 barrels per day this year, a sign the crude price collapse was taking longer than thought to hit the North American shale oil industry and other competing sources.

Front-month Brent LCOc1 was down $1.38, at $49.03, almost erasing gains made in the previous session, when it rallied its most since late May. US crude has lost 19% on the year, extending last year’s 46% drop. Brent is down 15%, after last year’s 48% tumble.

A slowdown in China’s economy, which is still expected to grow by around 7% annually, has been a key driver for the sharp drop in oil prices over the past year along with rising global supplies.

A weaker yuan would make dollar-priced commodities more expensive for Chinese buyers, limiting demand for commodities, said Hamza Khan, senior commodities analyst at ING Bank.

“On the other hand, if this devaluation is strong enough to lead to a recovery in Chinese exports and improve China’s GDP figures, then it will be bullish for oil,” said Mr Khan.

“The short-term impact is muted and the long-term impact is bullish.”

Data also showed auto sales in China fell 7.1% in July from a year earlier to 1.5m vehicles — their biggest decline since February 2013. But overall seven-month growth this year stood slightly above 2014 figures.