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Oil extends losses on China growth worries

China consumes around 12% of the world’s oil, second only to the U.S. In the past year, China’s demand has held up as the government and the local refiners took advantage of cheap oil prices.

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WTI for February delivery fell as much as $1.87 to $32.10 a barrel, the lowest level since December 29, 2003, on the New York Mercantile Exchange.

“Chinese equity markets temporarily halting again was like adding oil to fire, exacerbating the oil price rout”, said Daniel Ang, oil analyst at Phillip Futures.

China accelerated the devaluation of the yuan on Thursday, sending currencies across the region reeling and domestic stock markets tumbling, as investors feared the Asian giant was kicking off a virtual trade war against its competitors.

Unsurprisingly, three-month delivery contracts of copper (down 1.4%), nickel (down 1.0%), lead (down 2.2%), zinc (down 2.5%) and tin (down 0.2%) extended the previous session’s losses in late afternoon trading, while primary aluminium futures came in broadly flat.

Oil’s collapse may increase borrowing costs for producers as revenue falls.

“Clearly the economic concern is a factor, but that doesn’t really explain everything”, said Dominic Schnider, head of commodities and Asia-Pacific foreign exchange at UBS’s wealth-management unit in Hong Kong.

Since April 2004 Brent dipped around 5%, or about $2 per barrel, to a low of $32.16, a level not seen.

Oil’s rapid fall has made a prediction that Goldman Sachs made a year ago that crude could fall as low as $20 a barrel seem less outlandish than it then seemed.

The US Department of Energy’s weekly report on Wednesday showed a sharp drop in US commercial crude inventories, by 5.1 million barrels to 482.3 million barrels in the week ending January 1.

Until those “hefty” inventories begin to clear, oil prices will remain subdued, oil analyst Dominic Haywood from Energy Aspects told CNBC on Thursday, explaining the various factors adding to oil’s woes. “There is a weak backdrop given that the market is oversupplied”.

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Energy Aspects believed that prices would start to improve in the second half of the year when there would be “more aggressive production declines” with Haywood noting that the firm estimated a year-on-year decline of 250,000 barrels a day from US producers. “How low will prices go?” Prices fell 30 per cent previous year.

Oil prices have dropped despite tension between key producers Saudi Arabia and Iran.   SAUL LOEB    
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