China fears put brakes on crude trade

Oil fell more than $2 a barrel today after a surge to new record highs this week, pressured partly by worries about a possible slowdown in China.

US light crude fell $2.07 to $112.79 a barrel by 1230 GMT. It set a record high of $115.54 yesterday.

London Brent crude was down $1.62 at $110.81. It struck an all-time peak of $113.38 on Thursday.

A sharp fall in China's stock market today could herald the start of a slowdown in the Chinese economy, whose rapid expansion has been one of the main factors driving oil prices to all-time highs this year, analysts said.

"The market is a little bit on the defensive. The Chinese stock market is very weak and it looks as if that pressages an economic slowdown in China, which would be bearish for oil," Christopher Bellew of Bache Financial told Reuters.

China's stock market fell nearly 4% to a 12-month closing low as the biggest stock, PetroChina dropped for the first time below its price in last October's Shanghai initial public offer.

The Chinese market has been gripped by a downward trend for six months, triggered by high inflation and worries of a threatened economic slowdown later in the year.

Despite these fears, data from China this week showed continued large import volumes of distillates to meet domestic demand.

An unexpected fall in gasoline inventories in the US was the trigger for this week's price rise ahead of peak summer driving demand.

The long-term drivers for investment in the oil market are tight spare production capacity, slow output growth from non-Opec producers while robust demand from emerging economies is more than compensating for declining demand from industrial nations.

"Market balances continue to look tight, owing to persistent poor non-Opec production growth and steady demand increases. On the demand side Chinese consumption is improving, more than making up for weak OECD demand," said Barclays Capital.

Bellew noted there were signs of increased speculative funds coming into the oil market.

The premium for US crude, which attracts most speculative investment, over Brent rose to $2.06 today, up from a low of $1.52 in the previous session.

Oil's record run comes as the flow of investment across commodities shows no sign of abating.

Also lending support to commodities is the continued decline of the US dollar, making dollar-denominated commodities easier to afford for holders of other currencies and providing a hedge for those holding dollar reserves against dollar depreciation.