China's reserve cut move boosts oil price

Brent crude rose on Monday to near its highest level this year as oil market participants absorbed the decision by China's central bank to cut its reserve requirement ratio.

The People's Bank of China on Sunday moved to push more money into the economy to try to bolster slowing growth, cutting the amount of cash banks must hold against reserves by 1 percentage point.

Ice June Brent rose $0.57 to $64.02 a barrel while Nymex May West Texas Intermediate added $1.14 to $56.88 a barrel in afternoon trading.

"Last week the pressure on the stock market put the brake on the oil rally, crude oil is trying to regain that lost ground this morning," said Olivier Jakob at consultancy Petromatrix.

On a trip to South Korea, Ali Al Naimi, Saudi Arabia's oil minister, said on Monday he was "very positive" about the demand outlook for Asia.

"There is absolutely no concern from our side," Mr Naimi told Reuters on Monday.

Despite oil prices rallying this month on indications that US oil production may fall, analysts at Morgan Stanley cautioned about the sustainability of the price gains, with members of the Opec producers cartel increasing output by about 1m barrels a day in recent months.

"Saudi Arabia alone added the equivalent of half of Bakken production in a matter of months - far beyond any US slowdown," Adam Longson, an analyst for Morgan Stanley, said in a note, referring to the largest US shale play.

Mr Naimi said: "I have said many times we will always be happy to supply to our customers with what they want." He added that the kingdom was producing "around 10m [b/d]".

Earlier this month, the veteran oil minister of Opec's largest producer and de facto leader said the kingdom produced 10.3m b/d in March, a record high that surpassed the 10.2m b/d from August 2013.

Saudi Arabia led Opec into a battle for market share in November amid growing competition from rival producers such as the US. The group decided not to cut output to shore up the price of oil, helping extend a slide that had begun in June.

Base metal prices were also higher in the wake of the move by the Chinese central bank. Copper for delivery in three months on the London Metal Exchange rose $27.50 to $6,087 a tonne while aluminium added $19.50 to $1,834.50 a tonne.

However, there was a more muted reaction in the bulk commodities market. The most active iron ore futures contract on the Dalian Commodity Exchange was down 2 per cent on Monday morning. Iron ore is the key ingredient in steelmaking.

The PBoC has previously messaged that any reserve requirement ratio cuts are as "much to manage US dollar currency adjustments, as necessarily being stimulatory for the domestic economy", said Melinda Moore, analyst at ICBC Standard Bank.

"While steel and related industries may benefit from lower rates, banks are still cautious on further lending to these sectors, and if anything, credit ratings for these sectors are being lowered, pushing risk assessments higher, which may offset any benefits from the [reserve requirement ratio] cut," Ms Moore said.

"Continuing overcapacity in these sectors is also providing an overhang to any uplift in the investment profile of steel-consuming sectors."

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