Oil prices edge up but market remains cautious as Asian stocks keep tumbling

By Henning Gloystein

SINGAPORE (Reuters) – Crude oil markets edged up but remained near 6-1/2-year lows on Tuesday, following a session that saw prices fall as much as 6 percent after a Chinese equities rout sent global markets into a tailspin.

Asian stocks looked vulnerable to another sell-off on Tuesday, with investors gripped by fears of a hard landing for the Chinese economy, the world’s most important growth engine.

Japan’s Nikkei (.N225) index fell 3.8 percent to six-month lows, while the MSCI’s broadest index of Asia-Pacific shares outside Japan hit fresh three-year lows.

Crude oil markets reacted cautiously in early trading, staying at levels comparable to the peak of the global financial crisis in 2009 and suggesting that fears over the economic outlook in China, the world’s second-largest oil consumer, are now at least equally as big as previous concerns of oversupply that has plagued the market for over a year.

U.S. crude futures (CLc1) were trading up 24 cents at $ 38.48 per barrel at 0113 GMT, while Brent (LCOc1) was up 26 cents at $ 42.95.

“There was a sea of red across the commodities space,” ANZ bank said on Tuesday morning.

For crude oil, the bank said that “the sharp decline was driven by concerns around slowing Chinese demand just as OPEC and the U.S. expand a global glut”.

Output from the Organization of the Petroleum Exporting Countries (OPEC) has hit records in a bid to squeeze out competition especially from U.S. shale producers. But they have so far been resilient to the resulting price plunges and kept pumping oil.

ANZ noted that hedge funds had reduced their net-long position in WTI to a five-year low last week, and other indicators also helped fuel bearish sentiment.

Since the beginning of August, traders have taken up huge options to sell WTI, known as puts, once it falls to $ 35 and $ 30 per barrel.

The value of these puts has soared by 440 percent and 345 percent respectively for $ 35 and $ 30 per barrel, with each now worth $ 1.56 and 67 cents.

Yet following the spike in their value, open interest in their trading started to fall late last week, and while some traders said this could imply that short-sellers are closing positions and trigger a short-lived price rise, technical indicators remain bearish.

Reuters analyst Wang Tao said that U.S. crude could drop to $ 37.05 per barrel, based on a Fibonacci analysis, and that Brent could target $ 40.29.

(Reporting by Henning Gloystein; Editing by Joseph Radford)