DEVELOPING STORY
*Nymex Crude Settles Down $1.88, or 4.2%, at $43.08/Bbl
*US Oil Plunges to Six-Year Low
*Drop in China's Currency Raises Fears of Sluggish Oil
Demand
More to come
Earlier:
U.S. oil has fallen below its lowest settlement price from the
past six years as China's decision to devalue its tightly
controlled currency is spreading pessimism among investors about
China's ability to help soak up a world-wide glut of crude.
The move would make China's imports of dollar-priced commodities
such as oil more expensive, analysts said. The yuan registered its
biggest one-day loss in two decades following the central bank's
decision.
The currency devaluation could hurt demand in the world's
second-biggest petroleum consumer at a time when oil prices are
already trading near their lowest levels for the year, analysts
said.
"It...suggests that the Chinese economy is still struggling to
move out of its slowing pattern and into a growth spurt," Dominick
Chirichella, analyst at the Energy Management Institute, said in a
note. "Overall it continues to suggest that the main oil growth
engine of the world is not going to come to the rescue of the
oversupplied global oil market anytime soon."
Light, sweet crude for September delivery fell $1.88, or 4.2%,
at $43.08 a barrel on the New York Mercantile Exchange, near
four-month intraday lows. U.S. oil set a six-year low closing price
at $43.46 a barrel on March 17 and has traded as low as $42.03 this
year.
Brent, the global benchmark, fell $1.56, or 3.1%, to $48.85 a
barrel on ICE Futures Europe. Brent, while also nearing a six-year
low, is still more than $2 a barrel above it.
The Organization of the Petroleum Exporting Countries,
responsible for more than a third of world's oil supply, also said
Tuesday that its members raised their collective output to the
highest level in three years in July. OPEC's output increased by
101,000 barrels a day to 31.5 million barrels a day last month, the
oil cartel said in its monthly report.
OPEC had just a day ago played a role in a small recovery for
oil prices, which saw Brent jump 3.7%. Many had speculated the
cartel was planning an emergency meeting to respond to low oil
prices.
High oil output from the U.S. and some of the world's biggest
petroleum producers, coupled with concerns about an economic
slowdown in China, have hit investor sentiment in recent weeks. Oil
prices plunged into a bear market last month and are off more than
50% from last year.
Even though official data suggest U.S. oil output peaked in
March, it has been at near multi-decade highs, at around 9.5
million barrels a day. As other major global suppliers such as
Saudi Arabia and Russia have been pumping crude at a record
pace—and with Iran likely seeing a ban on its exports ending
soon—there are few signs that the global oversupply of oil will
abate in the near future.
Investors believe that U.S. producers can sustain their
near-record pace and that global exporters will also be pushing to
mitigate any declines, analysts at Credit Suisse Group AG said
Tuesday. Those investors appear to have lost confidence that demand
growth can keep up and have been selling off long-dated futures,
leading to the recent steep decline in front-month prices, Credit
Suisse said.
"That is a warning flag—a death canary if you want to go that
route," Jan Stuart, the bank's global energy economist said in a
conference call.
Later on Tuesday, the American Petroleum Institute, an industry
group, will release its data for the U.S. oil inventory levels
followed by the official report by the U.S. Energy Information
Administration on Wednesday, which will also report on the U.S.
weekly oil output.
"U.S. production remains near the highest level in four decades,
although the commodity price is telling the U.S. shale sector to
shrink, " OPEC said in its report. The higher output is largely due
to increased cost efficiencies, lower taxes and existing projects
coming on stream, it added. The group said that, for example, in
North Dakota, many projects can still be profitable at $24 to $41 a
barrel.
OPEC forecasts U.S. output to rise this year by nearly a million
barrels a day and another 320,000 barrels a day in 2016.
While many are concerned Tuesday about whether global demand can
keep up, the technical aspects of how currencies affect oil prices
are likely an even bigger factor in oil's slide, said Hamza Khan,
head of commodity strategy at ING Bank in Amsterdam. The dollar's
rise in the past year has played a big role in oil's concurrent
decline because oil is priced in dollars and becomes more expensive
for holders of other currencies as the greenback appreciates. Oil
usually goes down when the dollar goes up. The Wall Street
Journal's dollar index recently traded up 0.4% on the day.
"People are thinking that China's currency (decision) could open
a currency war, which could make the dollar even stronger," Mr.
Khan said.
Gasoline futures traded down 1% at $1.6775 a gallon. Diesel
futures fell 2.5% to $1.5523 a gallon.
Benoî t Faucon contributed to this article.
Write to Georgi Kantchev at georgi.kantchev@wsj.com and Timothy
Puko at tim.puko@wsj.com
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