Oil fell below $69 a barrel on Wednesday, at one stage losing more than $1, after a near 5 percent 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 percent in the previous session on tentative signs oil demand could be picking up in the United States, the world's largest energy consumer. Now, with investors' desire to take on more risk firmly linked to Chinese growth, confidence has been shaken.
By 1242 GMT (8:42 a.m EDT), U.S. crude for September delivery was down 51 cents at $68.68 a barrel, off an earlier session low of $68.05. London Brent crude for October was down 67 cents at $71.70.
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 percent in just two weeks but remain up by more than 50 percent so far this year.
European shares tracked Chinese equities lower, while U.S. futures pointed to a lower open.
Oil prices had been supported by data released late on Tuesday from the American Petroleum Institute (API) showing U.S. crude oil stockpiles fell last week by 6.1 million barrels, against forecasts for a 1.3 million barrel build.
U.S. 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 U.S. Energy Information Administration (EIA) data at 1430 GMT (10:30 a.m. EDT) will be closely watched to see if it confirms the API's bullish figures, and will determine the market's trading tone for the rest of the week.
If the EIA data confirms the API report, we could see the market head higher. The $76 level will be a top for the market in the medium term until we see further drawdowns in the inventories, said Tony Nunan, risk manager at Tokyo-based Mitsubishi Corp.
WEATHER AND OPEC
Traders also watched for storms in the Atlantic Basin but there was no immediate threat seen to U.S. oil installations in the Gulf of Mexico.
Hurricane Bill, the first of the 2009 Atlantic season, grew into a major Category 4 storm on Wednesday, as it moved closer to Bermuda.
Kuwait sees no need for OPEC to change oil supply targets at its meeting in September as the oil price is satisfactory, the country's oil minister said on Wednesday.
The Organization of the Petroleum Exporting Countries, supplier of over a third of the world's oil, meets on September 9 in Vienna to discuss supply policy.
Oil prices have more than doubled so far in 2009, boosted in part by OPEC's decision to cut supplies to the market.
(Additional reporting Emma Farge in London and by Jennifer Tan in Singapore; Editing by Anthony Barker)