Crude oil closed Monday at just over $38 a barrel, after dipping below that mark in earlier trading. The main concern is uncertainty over the Chinese economy, which has worsened in recent days as Beijing has allowed China’s currency, the yuan, to fall against the dollar.
“China being the second-largest economy [in the world], it uses a lot of oil,” says Linda Donovan, a senior vice president for Morgan Stanley, based in Houston. “However, oil is denominated in U.S. dollars. A weak yuan means China’s purchasing power is reduced, which could prompt the Chinese to spend less on oil-based products.”
Global oil markets are already awash with excess supply from both U.S. and Saudi producers. Donovan says the more China’s economy slows, the worse that glut is likely to become and the farther oil prices may fall.
China is also the second-largest export market for the Port of Houston, after Mexico. The weaker yuan stands to affect shipments out of Houston not just of oil-related products but of everything from soybeans to heavy machinery.