Oil fell below $69 a barrel today after a near 5 per cent slump in Chinese shares sent doubts rippling through global markets about the strength of the world economic recovery.
Prices had surged by more than 3 per cent in the previous session on tentative signs oil demand could be picking up in the United States, the world's largest energy consumer, but with investors' desire to take on more risk again firmly linked to Chinese growth, confidence has been shaken.
By 9.55am, US crude for September delivery was down 28 cents at $68.91 a barrel, off an earlier session low of $68.54. London Brent crude for October was down 50 cents at $71.89.
"The good news that has driven markets over much of the summer has been emanating from China, they seemed to be leading the return to global growth," said Paul Harris, head of natural resources risk management at Bank of Ireland Global Markets.
“But this is going to be a patchy recovery as we emerge from such a sharp global slowdown - it's not going to be in a straight line, even if this equity sell-off doesn't really signal any fundamental changes to the outlook for oil.”
Shanghai stocks tumbled to a two-month low and have slumped by around 20 per cent in just two weeks but remain up by more than 50 per cent so far this year.
Oil prices had been supported by data released late last night from the American Petroleum Institute (API) showing US crude oil stockpiles fell last week by 6.1 million barrels, against forecasts for a 1.3 million barrel build.
US distillate stocks rose by 1.5 million barrels, more than double what analysts had expected, while gasoline stocks fell less than forecast.
The release of the more closely watched US Energy Information Administration (EIA) data later in the day could confirm the American Petroleum Institute's (API) bullish figures, and will determine the market's trading tone for the rest of the week.
Reuters