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U.S. crude falls by 5%, amid continuing economic woes in China

Published 01/11/2016, 02:22 PM
Updated 01/11/2016, 02:32 PM
WTI and Brent crude both closed under $32 a barrel on Monday

Investing.com -- U.S. crude futures fell sharply by more than 5% on Monday, as widespread concerns related to the slumping China economy pulled prices down to fresh 12-year lows.

On the New York Mercantile Exchange, WTI crude for February delivery traded in a broad range between $30.89 and $33.20 a barrel before settling at $31.43, down 1.74 or 5.27% on the session. With the dramatic losses, U.S. crude futures closed lower for the seventh straight session. Since closing 2015 slightly above $37 a barrel, the front month contract for WTI crude has tumbled approximately 12%.

On the Intercontinental Exchange (ICE), brent crude for March delivery wavered between $31.55 and $33.77 a barrel, before closing at $31.88, down 2.03 or 5.98% on the day. North Brent Sea futures also suffered their seventh consecutive loss on Monday. Following a decline of approximately 30% last year, brent futures have tumbled more than $5 a barrel in 2016.

On Monday, the People's Bank of China (PBOC) attempted to calm markets by setting the daily fix for the yuan against the dollar dramatically higher in comparison with its level at last week's close. Although the Chinese currency surged against the dollar in offshore trade, Chinese equities continued to plunge – extending severe losses from the opening week of the year.

The PBOC set the yuan's midpoint at 6.5626 per dollar on Monday, substantially higher than last Thursday's level when it experienced its worst one-day decline in five months. Over the course of a trading day, the PBOC intervenes to prevent the exchange rate from drifting 2% above or below the midpoint. The PBOC devalued the yuan 1.6% last week, after lowering it by nearly 5% against the dollar in 2015 in an effort to stimulate its economy by boosting exports. At 10.5 million barrels per day, China consumes more oil than any other nation in the world besides the U.S.

The latest oil sell-off has exacerbated concerns that crude prices could fall as low as $20 a barrel in the short-term future. Analysts from Morgan Stanley (N:MS) warned that stronger devaluations in the yuan could cause energy prices to spiral even further.

Elsewhere, investors digested reports of an attack at a mall in Baghdad, where gunmen reportedly set off a car bomb at the entrance, killing at least 10. The mall is located in eastern Baghdad, an area predominantly occupied by Shiite Muslims. Gold's appeal as a safe-haven asset has accelerated since a Shiite cleric and 46 others were executed in Saudi Arabia on Jan. 2, triggering the latest round of sectarian discord in the region. Oil prices are sensitive to heightened geopolitical risks in the Middle East, where more than 30% of crude oil in the world is produced.

Also on Monday, European Union foreign policy chief Federica Mogherini said while an exact date has not been set for lifting economic sanctions against Iran, a decision could come soon. Iran is expected to increase its exports by as much as 500,000 barrels per day when the multi-year sanctions against the Gulf state are lifted by Western powers. The move is viewed as bearish for energy prices, which have slumped by more than 70% in the last 18 months as global supply has severely outpaced demand.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, gained more than 0.25% to an intraday high of 98.91. The index remains near 12-month highs from December, when it eclipsed 100.00.

Dollar-denominated commodities such as crude become more expensive for foreign purchasers when the dollar appreciates.

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