China’s decision to devalue the yuan sent the U.S. oil benchmark tumbling back toward a six-year low on fears over the health of the Chinese economy and the country’s appetite for crude.
Light, sweet crude futures for delivery in September CLU5, -4.00% fell $1.59, or 3.6%, to $43.36 a barrel on the New York Mercantile Exchange, trading below the six-year closing low at $43.46 set in March.
Brent crude LCOU5, -2.86% the global benchmark, fell $1.22, or 2.4%, to $49.19 a barrel on London’s ICE futures exchange.
China’s decision to devalue the yuan will make imports of a number of commodities including crude oil more expensive. The drop saw oil futures give back most of the gains scored in a sharp Monday rebound inspired in part by a weaker dollar.
“Since July, every time oil gets a bid there is some news to squash the rally,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago.
Crude oil, like most other commodities are pegged to the dollar, which means China’s imports will become costlier.
The yuan move also raises the fear that China’s slowdown is accelerating and that the country’s government might be panicking, Flynn said, in a note. It also raises fears that other countries will respond with competitive devaluations of their own, he said.
A glut of supplies has been the main driver behind a slump in oil prices.
The Organization of the Petroleum Exporting Countries on Tuesday said the group’s production rose to its highest level in more than three years. Members pumped 31.51 million barrels a day in July—a rise of 101,000 barrels a day over June to the highest level since May 2012. Read:OPEC pumps at 3-year high despite oversupply.
Oil demand is already at near seasonal peak levels and will fall from the second half of this year while excess supply may extend to the second half of this year as well as next year because of high output levels from OPEC members, a Morgan Stanley report said.
Over and above, Iran has signaled its intent to push up its output and increase international supplies as soon as sanctions are lifted.
Barnabas Gan, an economist with OCBC Bank, said investors will also be closely monitoring weekly U.S. crude oil inventory data to be issued late Wednesday as any slippage may support prices.