Oil battles interest rates, demand uncertainty

HOUSTON - Crude oil fell into negative territory as it battled possible U.S. interest rate increases and uncertainty around future Chinese demand on Monday.

Brent crude was at $84.48, down 33 cents, at 11:41 CDT (1641 GMT) after briefly turning negative.

U.S. West Texas Intermediate crude was off 8 cents at $81.17 a barrel.

In Monday's session both crudes have been up $1 and then turned negative.

Interest rate increases by the U.S. Federal Reserve to tame inflation are driving down U.S. economic activity while China continues to tarry in returning to pre-pandemic levels, said John Kilduff, partner at Again Capital LLC.

"It seems that (China's recovery) is not going to happen," Kilduff said. "It's doubtful they're going to be buying. They bought a lot of crude for storage earlier in the year. They're sitting on a lot of crude."

Both front-month benchmark prices snapped a seven-week winning streak last week with a weekly loss of 2% on concern that China's sluggish economic growth will curb oil demand, while the possibility of further increases to U.S. interest rates also overshadows the demand outlook.

China's central bank trimmed its one-year lending rate by 10 basis points and left its five-year rate unmoved. That was a surprise to analysts who had expected cuts of 15 bps to both as recovery in the world's second-largest economy has been slowed by a worsening property slump, weak spending and tumbling credit growth.

Top exporter Saudi Arabia's July shipments to China fell 31% from June while Russia, with its discounted crude, remained the Asian giant's largest supplier, Chinese customs data showed.

China's crude oil imports from Saudi Arabia are expected to remain depressed through the third quarter, analysts said.

China is drawing on record inventories amassed earlier this year as refiners scale back purchases after prices were driven above $80 a barrel by supply cuts implemented by the OPEC+ group comprising the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia.

"We still see a tight oil balance for the remainder of the year, which suggests that prices still have some room to run higher," said Warren Patterson, ING's head of commodities research, adding that the dollar was also providing support.

A weaker dollar makes oil purchases less expensive for holders of other currencies, potentially boosting demand.

(Reporting by Erwin Seba in Houston, Natalie Grover and Paul Carsten in London, Florence Tan in Singapore and Mohi Narayan in New DelhiEditing by David Goodman, Mark Potter, Barbara Lewis and Nick Macfie)