Added January 21, 2010

Crude oil trading down two percent on China, US dollar

Crude oil prices plunged in trading on Wednesday on a stronger US dollar and amid investor concern that China’s government will continue to tighten its credit policy. Oil prices fell $1.87, or nearly 2%, to settle at $77.62 a barrel, after dipping as low as $76.96 a barrel earlier in the session.

Reports that China has asked major banks to cease lending until the end of the month in order to tighten the country’s credit market spooked investors. The news comes a week after the Chinese government raised bank reserve requirements for the first time since 2008.

“This shows us that China is serious about slowing down its explosive demand growth,” said Phil Flynn, a senior market analyst at PFG Best. “If the Chinese government continues to take steps to slow the economy, it’s going to be bearish for prices in the short term.”

Meanwhile, the dollar rose as investors lost their appetite for risk, worrying about China’s attempts to slow its economic growth. “That market seems to be on fire today,” he said. “The dollar’s incredible strength is definitely going to put pressure on the market.”

What analysts are saying: “It’s going to be harder and harder to maintain these prices,” said Flynn. “There’s no doubt the economy is getting better, what is in doubt is whether that translates into $78 to $80 prices for oil.”

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Crude oil trading down two percent on China, US dollar

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