Oil Falls by Most in Five Weeks Amid Fear of Chinese Demand Drop

(Bloomberg) -- Oil tumbled by the most in more than five weeks as fears of falling oil demand in China overshadowed news that Libya’s crude supply was disrupted.

Futures fell 2.5 percent in New York. China’s oil refining dropped the most in three years in July, while crude output retreated from the highest this year. Libya’s biggest oil field, Sharara, cut output by more than 30 percent because of security threats, a person familiar with the matter said. Meanwhile, the dollar strengthened, eroding the lure of commodities as a store of value.

"We’re seeing some strength in the dollar, and the preponderance of news seems to be favoring the bears right now," Phil Flynn, senior market analyst at Price Futures Group Inc. in Chicago, said by telephone. "If you look at the China data this morning, when it came to the China refinery runs being down in July, that’s adding to the perception of slowing demand, and it’s offsetting the concerns about Libyan oil production."

Oil has lingered below $50 a barrel in New York this month as investors weigh rising global supply against output curbs from the Organization of Petroleum Exporting Countries and its allies. Data on China’s sliding refinery runs are stoking fears that the world’s second-largest oil consumer will taper its appetite.

In the U.S., producers keep drilling for more oil, with the number of active rigs at its highest since April 2015 and the Energy Information Administration forecasting crude output at major shale plays reaching an all-time high of 6.15 million barrels a day in September.

West Texas Intermediate for September delivery fell $1.23 to settle at $47.59 a barrel on the New York Mercantile Exchange, the lowest level in three weeks. Total volume traded was about 3 percent above the 100-day average.

Brent for October settlement declined $1.37 to end the session at $50.73 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a premium of $3 to October WTI.

Chinese oil processing in July dropped 4.4 percent from the previous month to about 10.76 million barrels a day, according to Bloomberg calculations based on data released Monday by the National Bureau of Statistics.

"The China news for oil is a concern," Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, said by telephone. "Beijing is trying to land an aircraft being buffeted by strong crosswinds. After goosing the engine earlier this year, now they’re tapping the brakes a little bit."

‘Sign of Weakness’

Amid all the signs of a persistent supply glut, famed trader Andy Hall said goodbye to the oil market as the outlook for prices worsens. Hall, a trader nicknamed "God" by his peers, said he decided to close his flagship hedge fund, citing a deteriorating outlook for prices next year and the “frustrating” dominance of algorithmic traders.

"The fact that OPEC has had to talk about further extending its production cuts is ultimately a sign of weakness, not of strength,” Hall said in an Aug. 1 letter to investors that was reviewed by Bloomberg News. There’s no clear view on how shale supply will respond to shifts in the market and therefore no consensus on a long-term price anchor for oil, he said.

“For a long time, there was a sense of ‘oh, in another year or two the market will tighten up again’ and I think people are starting to think that’s maybe not the case,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by telephone.

Oil-market news:

The Bloomberg Dollar Spot Index rose as much 0.4 percent. U.S. crude stockpiles probably fell by 3.6 million barrels last week, according to the median estimate for 8 analysts in a Bloomberg survey. Cushing crude stocks rose 700,000 barrels last week, Bloomberg forecast shows.

With assistance from Ben Sharples and Grant Smith. To contact the reporters on this story: Nico Grant in New York at ngrant20@bloomberg.net; Jessica Summers in New York at jsummers24@bloomberg.net. To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Carlos Caminada, Reg Gale.