Commodity Corner: Crude Drops on Latest China Rate Hike

Crude futures fell Tuesday on news that China is increasing key interest rates yet again.

China, the world's second largest consumer after the U.S., increased interest rates for the third time since mid-October in another attempt to tame inflation. The country's central bank will increase its one-year lending and deposit rates by 0.25 percent each. Investors fear that high interest rates could cause China's oil demand to taper off. According to the International Energy Agency (IEA), China's fuel demand growth was forecasted at 4.8 percent in 2011 compared to a 12-percent jump in 2010.

Crude futures for March delivery settled at $86.94 a barrel, losing 54 cents from the previous trading session.

Oil prices also suffered as the political tension in Egypt appeared to ease. Although anti-government demonstrations and strikes continue, analysts predict no disruptions in the Suez Canal.

In addition, the importance of the Nymex contract remains under scrutiny as the spread (the difference between the two contracts) continues to widen. Unlike its European counterpart Brent, Nymex—the U.S. oil contract—has only one delivery point in Cushing, Ok. Investors fear an increase in stockpiles in Cushing.

The intraday range for crude futures was $85.88 to $88.11 a barrel.

Due to above-normal temperatures, the natural gas futures price continue to decline to its lowest point in 12 weeks. On Tuesday, natural gas prices declined 1.6 percent, settling at $4.04 per thousand cubic feet, after fluctuating between $4.03 and $4.13. Analysts claim that natural gas prices are following market sentiment, as opposed to the state of the physical market. In spite of the cold weather, traders assume ample supplies in stockpiles.

Front-month gasoline futures gained 4.37 cents ending Tuesday's trading session at $2.49 a gallon. Prices traded Tuesday between $2.42 and $2.51 a gallon.