Crude Tests $80 on Chinese Demand Concerns

Edging down more than $1 on China's unexpected move to tighten its central bank's monetary policy, U.S. crude oil futures came under pressure once more on the New York Mercantile Exchange as oil traders worried that the Far Eastern country may suppress its ravenous appetite for petroleum to curb inflation.

The price of light, sweet crude oil for February delivery booked an additional loss on Tuesday, ultimately settling $1.73 less than yesterday's final price tag to $80.79 a barrel. On the other hand, natural gas spot prices at the Henry Hub traded in the opposite direction, adding 14 cents to close higher at $5.591 per thousand cubic feet.

At the week's open, oil and natural gas prices began to thaw from recent highs as national forecasts called for warmer temperatures during the next several days.

Also helping to spur oil futures to the downside, today's Energy Information Administration's Short-Term Energy Outlook highlighted a reduction in oil demand growth for both the global and U.S. market in 2010.

Oil Takes Cover as Bears Show Teeth

"There were a lot of factors at play today that really seemed to put some pressure on this market," said Phil Flynn, vice president in charge of research for Chicago-based PFGBest, a futures trading firm.

"First of all, there was a negative mood in a lot of commodities, whether it be copper or gold, and that began last night when we received lower-than-expected earnings out of Alcoa," the analyst noted. "Being a big commodity company, their disappointing earnings cast a pall on the market. But the other thing that seemed to put pressure on commodities overall was the Chinese government's raising the reserve requirements on Chinese banks, which essentially is another sign that China might be concerned with the rapid demand growth that we've seen for many of the commodities in China."

Tightening the country's purse strings, The People's Bank of China today announced that it will raise by 0.5 percentage point the share of banks' deposits that they must keep on reserve at the central bank.

"Obviously, China's policies for stimulating its economy has worked really well, and considering that China imported a record amount of crude last year, I think there is concern that this rebound could cause inflation" Flynn said. "By raising reserve requirements on the banks faster than expected, it is lowering some of the demand expectations for oil because, basically, when we are talking about demand for oil, we're talking about China."

Flynn also pointed to the EIA's reduced demand growth expectations as another impetus for today's bearish sentiment.

"Despite all of these unsupportive factors, the oil market failed to take out $80, which was a supportive area for the energy commodity and gave some hope for the bulls today," he emphasized. "I think $80 is going to be a very important psychological area as we enter tomorrow."




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Brent Crude Oil : $51.78/BBL 0.77%
Light Crude Oil : $50.85/BBL 0.83%
Natural Gas : $2.99/MMBtu 4.77%
Updated in last 24 hours