China Rate Increase Sends Oil Lower


"It took the wind out of the sales of the oil market."

Oil prices fell about 2% after China surprised markets by raising interest rates to cool its red-hot economy.

Benchmark oil for November delivery was down $1.78, or 2%, to $81.38 a barrel on the NYMEX.

Investors had been pushing oil prices higher since the U.S. Federal Reserve indicated in late August that it's prepared to pour more money into the economy to spur growth. That prompted further weakness in the USD, because oil—priced in dollars—becomes cheaper for foreign currency holders, so they buy more oil and send prices higher.

China's rate increase of 0.25%—its first such move in nearly three years—effected strength in the dollar and investors sent prices of crude oil, gasoline, and heating oil lower. They also bailed out of other commodities like gold.

"It took the wind out of the sales of the oil market," said Phil Flynn, senior energy analyst at PFGBest in Chicago. "It gave the dollar some momentum and commodity traders moved for the exits."

The dollar rose 1.34% against an index of foreign currencies.

Oil has traded in concert with the U.S. stock market recently, and that trend continued. The DJIA lost 114 points, or 1%, in morning trading.

Investors have pushed oil prices higher in spite of abundant supplies in the U.S. in part because of expected demand from China's growing economy. "If you start to raise interest rates in China and their economy slows, then global inventories suddenly look higher," said Flynn.

An oil supply report from the Energy Department's Energy Information Administration - will be out on Wednesday.

"High oil inventories combined with sluggish demand conditions in most advanced economies are expected to keep the oil market in surplus over the rest of 2010," said National Australia Bank, which forecasts crude will average $78/barrel in Q410.

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