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Fri 21 Jan 2011 01:29 PM

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Oil falls over $2 on US stocks, Chinese inflation

Positive US jobless data fails to ease worries of investors and support market

Oil falls over $2 on US stocks, Chinese inflation
SHARP DROP: US crude futures fell by nearly around $2.35 per barrel, while ICE Brent futures for March were down by $1.80 per barrel

Oil prices fell to as low as $88 a barrel for the first time in 10 days, sliding by over $2 as concerns about high US inventories and Chinese inflation outweighed positive US jobless data.

US crude futures fell by nearly around $2.35 per barrel to $88.51 per barrel by 1649 GMT, while ICE Brent futures for March were down by $1.80 at $96.36 per barrel.

The March spread between the two grades hovered close to $7 as the unusually wide Brent premium persisted following figures from the Energy Information Administration (EIA).

US crude stocks unexpectedly rose 2.62 million barrels in the week to Jan 14, the EIA report showed, against expectations of a 600,000 barrel draw.

But the surprise increase was smaller than reported by the American Petroleum Institute (API) after the close on Wednesday. The API reported a 3.5 million barrel rise in crude inventories, against an expected draw of 600,000 barrels.

US oil prices pared losses following the EIA release, recovering by around 50 cents from lows of $88 per barrel.

The market was in negative territory for most of the day, but losses were modest until after the start of US trading hours when crude began plunging.

“What we are seeing now is the impact of the US market opening after the release of the Chinese statistics during the night,” said Christophe Barret from Credit Agricole.

“A very strong impact in crude stocks was relatively bearish. The Transatlantic pipeline (outage) is finished, so there is room to pressure the market to go down,” he added.

Stronger-than-expected Chinese growth data spurred concern on Thursday about tighter monetary policy, prompting a selloff in equities led by emerging markets.

In Europe, the FTSE 100 was down by over 1.8 percent on Thursday afternoon.

Worries about China overshadowed a positive US initial jobless claims report, showing claims had fallen more than expected last week. The decline was the widest since February last year, erasing a holiday related spike to show a trend toward a healthier labour market remained intact.

The unexpected stock build in both the API and EIA reports has compounded bearish sentiment about global demand, and analysts have argued the recent oil market rally may have run out of steam.

“We may be reaching the upper limits of where markets are willing to push this in the absence of any really strong bullish signals for the global economy,” said Simon Wardell, an analyst at Global Insight.

Goldman Sachs’ commodities trading risk has hit a near seven-year low, quarterly results on Wednesday showed, suggesting the Wall Street giant had become less aggressive lately in taking advantage of surging oil, metals and grains prices.

Analysts say a persistently weak US dollar has helped offset bearish signals from the world economy and global supply. But the US dollar was up by more than 0.5 percent versus other currencies following the jobless report, helping to spur oil prices lower.

The potential for measures to slow Chinese growth resulting in a hard landing for investors is one of the major worries cited by analysts heading into 2011.

“A lot of Asian economies, and especially China, [are] overheating. People have invested heavily in commodity shares and any disappointing news might provoke a ... correction,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

But not everyone is convinced Chinese attempts to curb inflation will result in lower oil prices.

“Even if the [Chinese] government is trying to curb the inflation, we doubt that it will succeed fully,” said the research team at Global Risk Management in a report, hiking their oil price forecast for 2011-12.

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