LONDON: Oil fell by more than $1 to near $74 a barrel on Friday after the outlook for energy demand was dented by China s surprise decision to tighten monetary policy for the second time this year.
China s central bank on Friday said it was raising banks reserve requirements from the end of this month in a bid to cool a rapidly growing economy. Few in the market were expecting the move.
Rapid growth and development in China, the world s second largest energy consumer, has boosted oil prices in recent years.
The International Energy Agency (IEA) said on Thursday oil demand has peaked in developed countries, but it still predicts world oil consumption will rise by 1.6 million barrels this year to 86.5 million barrels due to emerging market growth.
US crude for March delivery fell $1.22 to $74.06 a barrel by 1218 GMT, after settling 76 cents higher at $75.28 a barrel on Thursday. London Brent crude for the new front month of April fell $1.11 to $73.01.
Markets may view it negatively in the short-term as China might import less commodities, Barclays Capital analyst Amrita Sen said.
But in the longer term we definitely see it as beneficial for commodity demand. The worst thing that could happen to commodity markets would be for China s growth to shoot to 15 percent then crash to 5 percent. The policy of tightening keeps their growth on a far more sustainable path.
The US dollar rose to its strongest level against the euro since May 2009 on the news, as investors moved away from riskier assets. A stronger greenback often pressures commodities priced in dollars as they become more expensive for holders of other currencies.
US oil data
Despite the dip, oil is on track for a 3 percent rise this week, led by signs of higher heating demand due to US snowstorms and the bullish global oil demand forecast from the IEA.
European leaders sought to prop up Greece with words of support at a summit on Thursday, but failed to offer concrete proposals to help the country tackle its debt crisis.
The International Monetary Fund on Friday joined the EU in pledging support for Greece, but investors remain wary.
There s a lot of skepticism in the market about the EU summit, because there s no definitive plan – only political and moral support – so that s boosting the dollar and pressuring oil, said Michelle Kwek, an analyst at Informa Global Markets in Singapore.
Markets are still very much on edge, and that s going to be the main factor driving prices over the next week.
Traders will also scour weekly US oil inventory data on Friday from the Energy Information Administration (EIA) for further clues on demand in the world s largest consumer.
The EIA data was delayed until Friday at 1600 GMT from its usual Wednesday release because of the severe snowstorms that have swept the US East Coast.
A report from the American Petroleum Institute (API) on Tuesday showed US crude inventories jumped by 7.2 million barrels to 337.6 million last week, despite a drop in crude imports, against expectations of a 1.5 million rise.
The EIA inventory numbers are on tap for Friday, and should they come in with substantial builds we could see crude oil prices roll back some of their recent gains, MF Global analyst Edward Meir said. -Additional reporting by Jennifer Tan in Singapore