Crude Takes Cover as Market Spotlights China

Pressured by a rising greenback, falling U.S. equities and concern over China's banking restrictions, crude oil futures retreated more than 2% on the New York Mercantile Exchange Wednesday.

The price of light, sweet crude oil for February delivery shed more than a dollar to close on the NYMEX at $77.62 a barrel as a strengthening U.S. currency spurred oil traders' risk aversion.

Also heading further into negative territory, natural gas spot prices at the Henry Hub closed down to $5.496, although the energy commodity's futures have held close to the mid-$5 range for some time and are forecast to remain near the $6-threshold in the short term.

Trumping the euro on Wednesday, the dollar rose to a five-month high as safe-haven demand surged on concerns over the fiscal health and policy of Greece and China, respectively.

Yesterday, oil saw in uptick in price which pared the energy commodity's recent losses, but investors on Wall Street today zeroed in on China's recent lending reforms, which could potentially put a dent in a swift economic recovery across the globe.

Economic Optimism, Prices Lose Steam

"When we got the report that the Chinese government put the brakes on some of these banks to stop funding money, that really changed the persuasion of the market and commodities were hit hard," noted Phil Flynn, vice president in charge of research at futures trading firm PFG Best in Chicago.

Specifically, Chinese financial authorities instructed its banking institutions to halt new lending for the remainder of January to stymie the country's surplus of loans entering 2010. The move to tighten its purse strings has raised a red flag in the market to monitor the stability of China's banking system.

"Today's action in China is a reminder that it's economic stimulus that's really been driving [higher] oil prices," Flynn stressed.

Additionally, the crude oil market considered forecasts for this week's API and EIA reports underscoring domestic energy supplies. Both reports were delayed following Monday's holiday, but a Reuters poll of industry analysts shows crude stockpiles gaining 2.4 million barrels as refineries continue to pull the plug.