Oil Prices Recover but Market Still on Edge Over China Volatility

Crude-oil futures prices made a mild turnaround in early Asia trade Friday but the market remains on edge as fears of more volatility in the Chinese economy are keeping traders cautious.

Oil prices plunged to their lowest in more than a decade on Thursday after the Chinese government allowed the yuan to fall faster than anticipated. The move triggered a rapid-fire selloff in the Chinese stock market that triggered the "circuit breaker" mechanism, halting trading for the rest of the day within an hour of the opening.

China has since suspended the mechanism without saying for how long.

The Shanghai Composite Index opened up 2.2% Friday morning and the Nikkei also gained 0.4% to 17844.59.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in February traded at $33.76 a barrel at 0240 GMT, up $0.49 in the Globex electronic session. February Brent crude on London's ICE Futures exchange rose $0.43 to $34.18 a barrel.

Oil prices have been under pressure this week because of rising tension between Saudi Arabia and Iran. The escalating rift between the two key oil producers further damps any chance of a collaborative effort to cut global output, the main driver behind the current glut.

The glut is expected to expand more as Iran is prepared to make a full return to the oil market in coming months despite its deepened fissures with the kingdom.

"The rebound is just technical correction. There are hardly any positive news in sight and market confidence in the Chinese economy is dwindling," said a Singapore-based trader.

Worries of slowing Chinese crude demand have exacerbated the price declines for some time. Some say as China shifts from a manufacturing-based economy to a serviced-based one, the country's thirst for crude might subside.

However, others say such assumptions could be exaggerated because the Chinese government and local refiners will continue to take advantage of the current cheap oil to fill up their storages, keeping Chinese demand elevated.

"The Chinese government has reissued importing licenses for the local refiners, who will be eager to maximize the quotas so they can be qualified for the licenses again next year," said Gao Jian, an energy analyst at the Shandong-based SCI International.

Energy consultant Energy Aspects expects Chinese crude imports to rise to around 7 million barrels a day this year as refiners look to use up their allotted quotas.

"In addition, China's commercial and strategic petroleum reserves will remain strong in 2016. Despite delays to completing SPR tanks, the use of commercial and price sites is rising, suggesting that filling in 2016 is likely to be around 150 million barrels," the firm added.

Write to Jenny W. Hsu at [e-mail]

(END) Dow Jones Newswires

January 08, 2016 02:05 ET (07:05 GMT)

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