By Lisa Barrington
LONDON (Reuters) - U.S. oil prices fell towards six-year lows on Tuesday after stock markets tumbled in China, the world's largest energy consumer, adding to worries about global fuel demand at a time of heavy oversupply.
Chinese stocks fell more than 6 percent on Tuesday as the yuan weakened against the dollar, raising fears that Beijing may further devalue the currency. Such a move could decrease China's consumption and import levels.
Industrial metals, including copper, also traded near six-year lows, adding to bearish market sentiment.
"That is dragging oil lower - it was in bearish territory to start with," SEB chief commodity analyst Bjarne Schieldrop said.
North Sea Brent
U.S. crude futures
The rally followed the release of positive U.S. housing starts data. Analysts said some traders were also squaring short positions after recent price falls.
Both crude oil benchmarks have more than halved in value over the last year. They rallied earlier in the year but are now almost a third below their last peak in May. Data shows many speculators have taken huge bets on further falls.
U.S. stockpiles are expected to rise in coming months as refiners reduce operations for maintenance and the summer driving season comes to an end, reducing demand for U.S. crude.
Many oil traders are positioning themselves to profit from a further drop in U.S. prices, buying "puts" - options to sell contracts once they have fallen to a particular level - at prices as low as $35 and even $30 a barrel.
"It now seems only a matter of time before Brent slips below the 6-1/2-month low of a good $48 per barrel that it recorded a week ago and WTI falls below the 6-1/2-year low of $41.35 it reached at the end of last week," Commerzbank (XETRA:CBKG) said in a note to clients.
Underscoring the bearish sentiment, hedge funds cut their net long holdings of Brent crude futures for a fourth straight week, exchange data showed on Monday.