Oil hits four-month low on China rout, supply glut

[July 27, 2015]   By Karolin Schaps

LONDON (Reuters) - Oil hit four-month lows on Monday after a steep drop in Chinese stock markets and on more evidence of a global supply glut that has halved prices over the past year.

Chinese stocks tumbled more than 8 percent on Monday, the biggest one-day drop in eight years, showing an unprecedented government rescue effort to prop up valuations has run out of steam.

"Today's oil price fall has been driven by the slump in Chinese stock markets," said Carsten Fritsch, senior oil market analyst at Commerzbank in Frankfurt.

Front-month Brent crude <LCOc1> fell to its lowest in four months at $53.63 a barrel, down 99 cents by 1035 GMT. On Friday, Brent closed at $54.62, its lowest since March 19. U.S. crude for September <CLc1> was down 57 cents at $47.57 a barrel.

China is the world's biggest energy consumer and a huge oil importer. Investors worry that a stock market crash could destabilize the Chinese economy and cut fuel demand.

Global oil supplies are ample with major oil producers in the Middle East Gulf competing for market share and pumping 2-3 percent more oil than needed, analysts say.

Weekly U.S. drilling rig data showed on Friday that 21 oil rigs had been added, the highest gain since April 2014, pointing to a further increase in U.S. oil output.

In Iraq, exports from its southern oilfields are on course for a monthly record, having topped 3 million barrels per day so far this month.

"In the next couple of months, even if the global oversupply and seasonal weakness are becoming priced in, it is difficult to see where any price uplift will come from," said Societe Generale oil analyst Michael Wittner.

Investors were also looking to the U.S. Federal Reserve for direction this week. The central bank starts a two-day policy meeting on Tuesday that could result in a September interest rate hike that would strengthen the greenback.

"There is scope for the dollar bulls to be disappointed this week (which) might be a driver for oil prices and the commodities complex overall," said Ben Le Brun, market analyst at Sydney's OptionsXpress.

A weaker dollar makes dollar-denominated commodities, including oil, cheaper for consumers using other currencies.

(Additional reporting by Keith Wallis in Singapore; Editing by Christopher Johnson)

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