Singapore: Oil slipped on Tuesday, partly reversing sharp gains of the previous session, on concerns China may raise interest rates and cap energy demand growth, while a slowdown in Japanese and South Korean factory output added to evidence of a slowdown in Asia.
Traders were also looking for more evidence that US inventories would drain with a surge in demand for heating.
Prices climbed 2.4% on Monday, led by futures of distillate heating fuels including gas oil, as cold weather gripped northern Europe and the US Northeast, raising expectations of higher consumption.
US crude for January fell 25 cents to $85.48 a barrel at at 12:13pm, after rising $1.97 on Monday, when it briefly touched $85.90, the highest price since 12 November. Prices reached a 25-month high of $88.63 on 11 November 11.
“The oil demand growth contribution from emerging Asia next year, particularly China, implies that anything that happens there is very important,” said Serene Lim, a Singapore-based oil analyst at ANZ.
“With much talk about China monetary policy tightening, if that does happen it would eventually slow down economic growth and that would impact oil demand growth.”
ICE Brent slipped 17 cents to $87.17 after rising more than 2% on Monday, when it shrugged off fears that Ireland’s bailout might not help keep Europe’s debt woes contained.
China’s key stock index fell 1.6% to close at a seven-week low on Tuesday, with a shortfall of cash in the domestic money market creating a liquidity squeeze in the stock market.
Analysts said the drying up of cash in the market was prompting speculative retail investors, already on edge about whether the central bank would introduce further tightening measures, to sell heavily weighted financials and commodity issues.
The euro struggled and other Asian stocks fell as fears that Ireland’s fiscal problems could spread to other weak euro zone countries weighed on investor sentiment.
US crude oil inventories probably fell by 400,000 barrels last week as imports dipped, a Reuters poll of analysts showed, but analysts were divided with an equal number of them predicting a decline and an increase.
“You have to be cautious because typically at the end of the year inventories tend to come off because of tax purposes,” Lim said. “Refiners would tend to offload their inventories to offshore.”
Stockpiles of distillates including heating oil and diesel probably fell for a tenth consecutive week, shedding 900,000 barrels last week, the poll showed, while gasoline inventories probably climbed 1.2 million barrels.
An industry report on inventories from the American Petroleum Institutes (API) was due on Tuesday at 3:00am, followed by government statistics from the Energy Information Administration on Wednesday.
Cold temperatures in Northeast and northwestern Europe provided a boost to London gas oil and US heating oil distillate futures on Monday as the US December refined products contracts neared their Tuesday expiration.
Factories in Japan and South Korea, Asia’s second- and fourth-largest oil users, cut output in October, adding to evidence of a slowdown and boding ill for the rest of the world that has relied on the region to keep the global economy humming.
Opec president Ecuador joined a number of other oil producers on Monday in signaling tolerance for higher prices, saying crude could rise to $90 a barrel without endangering the world economy if growth picks up.
Secretive North Korea detailed for the first time its expanded nuclear programme on Tuesday, saying it had thousands of centrifuges, as pressure built on China to rein in its ally amid heightened tensions on the peninsula.