Oil prices slip lower on new China bank reserve rules

Oil prices fell by more than $1 in a nervous trading session on Friday after the outlook for oil demand was dented after China’s central bank on Friday said it was raising banks reserve rules from the end of this month in a bid to cool a rapidly growing economy.

China plans to raise the reserve requirement for its banks by 50 basis points from February 25. This has caught investors on the hop, since there was little expectation the Chinese government would tighten policy so soon after a number of recent moves in that direction.

China’s policy makers aim to avert asset bubbles and restrain inflation after flooding the economy with money last year to drive the nation’s recovery from the first global recession since World War II. The central bank said yesterday that it wants to gradually normalize monetary conditions from a “crisis mode” after gross domestic product expanded a more- than-forecast 10.7 percent in the fourth quarter from a year earlier, the fastest pace in two years.

Markets replied sending US Light crude oil futures for March delivery down $1.30 to $73.96 a barrel by 1054 GMT on the NYMEX, while in London Brent crude oil futures for the new front month of April fell $1.20 to $72.92 on the ICE Futures Exchange.

“Markets may view it negatively in the short term as China might import less commodities. But in the longer term we definitely see it as beneficial for commodity demand. The worst thing that could happen to commodity markets would be for China’s growth to shoot to 15 percent then crash to 5 percent. The policy of tightening keeps their growth on a far more sustainable path.” Barclays Capital analyst Amrita Sen said.

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