Oil prices hit two week lows today after a newspaper in China reported that the government could hike its interest rates as soon as this Friday, fuelling speculation that China will soon go for further monetary policy tightening after the inflation rate accelerated to 4.4% in October.
Prime Minister Wen Jiabao said yesterday that "market supply and consumer prices are related to the interests of the people and merit close attention".
China has implemented a series of measures to curb lending and keep the inflation rate down this year.
Further policy tightening measures would lead to slower economic growth in the country, which is the world’s second largest energy consumer behind the US.
Anticipation of lower oil demand from China offset the positive impact from yesterday’s inventories report from the American Petroleum Institute (API).
API said that crude oil stockpiles in the US shed 7.7 million barrels last week, while gasoline stocks declined 1.7 million barrels.
Meanwhile, equity and commodity markets were still under pressure form concerns that Ireland’s debt crisis will spread into other eurozone countries.
Ireland’s debt woes have pushed up borrowing costs for other European nations with sovereign debt issues such as Spain and Portugal.
Chancellor of the Exchequer George Osborne said today that the UK is ready to help Ireland and bring stability to the banking system.
The fears of a new wave of the debt crisis in Europe has weighed down the euro, pushing up the US dollar to make the dollar-denominated crude more expensive for holders of other currencies, denting demand.
US light, sweet crude for December delivery declined to US$81.68/barrel, while January crude fell to US$82.29/barrel on the New York Mercantile Exchange (NYMEX).
On the ICE Exchange, January Brent Crude dropped to US$84.16/barrel. Brent for February delivery last traded at US$84.38/barrel.
BP (LON:BP) was sitting just below the opening level, while fellow supermajor Shell (LON:RDSB) posted a small gain, as did BG Group (LON:BG).
Cairn Energy (LON:CNE) was down 1.7% and Tullow Oil (LON:TLW) declined marginally.
Amec (LON:AMEC) tacked on less than 1%. Another oil and gas engineering firm Petrofac (LON:PFC) posted a small loss.
Midcaps headed in different directions. Heritage Oil (LON:HOIL) and Melrose Resources (LON:MRS) were at the bottom of the pile with losses of over 2.5%.
Premier Oil (LON:PMO) advanced 1.3%.
Dragon Oil (LON:DGO), JKX Oil & Gas (LON:JKX) and Salamander Energy (LON:SMDR) rose marginally.
Service company Wood Group (LON:WG) slipped 3.8%.
EU focused explorer and producer Europa Oil & Gas (LON:EOG) was among the top performing small caps, surging 9.5%.