Oil fell more than 3 percent to around $70 a barrel on Monday as a drop in China's key stock dented optimism about the pace of economic recovery and the U.S. dollar strengthened.
China's key stock index dived 6.74 percent on Monday to a three-month closing low and recorded its second-biggest monthly loss in 15 years. European equities <.FTEU3> edged down and U.S. shares opened lower.
It's negative sentiment given the very weak Chinese market, said Eugen Weinberg, analyst at Commerzbank. This is definitely bad news for the commodities sector, especially oil and metals.
U.S. crude for October fell $2.54 to $70.20 a barrel by 1338 GMT (9:38 a.m. EDT), having fallen as low as $70.16 in intraday trade. London Brent crude lost $2.60 to $70.19.
The sharp drop in Chinese markets is causing concerns and is inevitably making some investors rethink on the risks to China's economy and question their assumptions on the country's growth rate and energy consumption, said Daniel Liu, a commodities strategist at MG Global Singapore.
Jitters about the Chinese economy, the world's second-largest oil consumer, also weighed on other Asian stock markets.
The dollar was up slightly against a basket of currencies <.DXY>, reducing the appeal to some investors of oil and other dollar-denominated commodities.
The Organization of the Petroleum Exporting Countries meets to review output on September 9 in Vienna. Several ministers and officials from the group have said it is likely to leave output targets unchanged.
Even though OPEC agreed 4.2 million barrels per day of supply curbs late last year and has kept output targets steady so far in 2009, actual production has been rising in recent months according to industry surveys.
In a further sign of that trend, Abu Dhabi, the main producer in OPEC member the United Arab Emirates, will lift supply to Asia in October, the state oil firm said on Saturday.
Despite the indications of higher supply from some in OPEC, oil has rallied from a low of $32.40 in December 2008, which was the weakest in nearly five years, to a 2009 high of $75 a barrel last week.
(Reporting by Alex Lawler and Fayen Wong in Perth; Editing by Peter Blackburn)