Oil Falls on Strong US Dollar, China Economy Worries

Oil prices declined more than 1% on Monday as concerns about China's faltering economic recovery and a stronger dollar weighed against seven weeks of gains on tightening supply from OPEC+ output cuts. Brent crude futures fell US$1.07, or 1.2%, to US$85.74 a barrel by 0631 GMT while US West Texas Intermediate crude was at US$82.12 a barrel, down 1.3%. Prices retreated as the US dollar index (DXY) extended gains after a slightly bigger increase in US producer prices in July lifted Treasury yields despite expectations the Federal Reserve is at the end of hiking interest rates. A stronger dollar pressures oil demand by making the commodity more expensive for buyers holding other currencies.

"Crude has been in overbought territory for some time now, defying expectations of a correction. It has been singularly focused on US economic optimism, to the exclusion of the increasingly stronger headwinds blowing in the eurozone and China," said Vandana Hari, founder of oil market analysis provider Vanda Insights. "A rebalancing is overdue but it may need a reality check in the markets stateside," Hari said.

Oil may be range-bound this week as China's sluggish economic recovery and a stronger US dollar could depress prices, but OPEC+ has indicated it would do whatever it takes to tighten supply and stabilize markets, CMC Markets analyst Tina Teng said. Supply cuts by Saudi Arabia and Russia, part of the alliance between the Organization of the Petroleum Exporting Countries and their allies, or OPEC+, are expected to erode oil inventories over the rest of this year, potentially driving prices even higher, the International Energy Agency said in its monthly report on Friday.

Reflecting tightening supply, the price spread between first- and second-month Brent held steady on Monday after settling at 67 cents on Friday, the widest since March. Meanwhile, a Russian warship fired warning shots at a cargo ship in the Black Sea on Sunday, ratcheting up tensions in a key area for commodities exports from Ukraine and Russia. In the United States, the number of operating oil rigs held steady at 525 last week, after falling for eight weeks in a row, according to Baker Hughes weekly report.