Oil Drops on Falling Equities, Concern China to Tighten Lending

Crude oil dropped from a 10-month high as concerns that China may tighten lending and more U.S. loans may default raised doubts about the strength of the world’s recovery from recession.

Oil fell in tandem with equities on signs Chinese banks may curb new loans and after SunTrust Banks Inc. said that U.S. lenders face more credit losses and commercial real estate may falter through 2010.

“Equity and oil markets have been very closely correlated in the last six months,” said Ben Westmore, an energy and minerals economist at National Australia Bank Ltd. in Melbourne. “There are concerns on some U.S. banks. Probably it would affect investment flows into the oil market.”

Crude oil for October delivery dropped as much as 96 cents, or 1.3 percent, to $73.41 a barrel on the New York Mercantile Exchange. It was at $73.91 at 2:51 p.m. in Singapore. Yesterday, the contract rose 48 cents to settle at $74.37, the highest since Oct. 15. Futures have gained 66 percent in 2009.

“Banks are still showing signs of weakness, the economy is staying afloat from federal spending, and there is high unemployment,” said Mike Sander, an investment adviser with Sander Capital in Seattle. “I would still shoot for a price range this week between $68 and $75.”

China Construction Bank Corp., the nation’s second-largest bank, said excess cash in the banking system has led to asset bubbles, underscoring concern that the nation’s lenders will rein in credit. Chinese banks handed out $1.1 trillion in new loans in the first half of this year, the most on record.

Stocks Decline

Oil futures in New York and the U.S. Standard & Poor’s 500 Index had a correlation of 0.7 over the last six months. A correlation of 1 means the two moved in lockstep. Oil and the Shanghai Composite Index had a correlation of 0.996 over the last month.

Most Asian stocks declined, with the MSCI Asia Pacific losing 0.3 percent to 113.09 as of 2:39 p.m. in Tokyo. The index rallied 2.5 percent yesterday, the steepest advance since May 19. link.....