China growth fears crush oil and commodities

Oil prices continued their steep slide Monday, with a barrel of U.S.-produced crude hitting a 52-week low of $47.20 a barrel as investors reacted to the biggest one-day stock sell off in China since 2007, and worries about an oil glut gained steam amid fears of an economic slowdown in China.

China, the world's second-biggest economy, is no longer growing at a double-digit percentage pace as it was a few years back, and investors around the globe are questioning whether the government's reported 7% growth in the second quarter truly reflects the state of China's economy.

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The world's oil market is already suffering from a supply gut, with Saudi Arabia and other oil-producing countries in the Middle East still producing oil at a record pace at the same time the U.S. has emerged as a key player in the world's oil market. Fears of a China slowdown, which could be exacerbated by the massive plunge of nearly 30% in Chinese stocks since peaking in June, coupled with a strong U.S. dollar that makes oil more expensive, is causing oil prices to fall sharply.

In today's trading action, a barrel of West Texas Intermediate crude, which in June 2014 was trading above $107 a barrel, is now down about 56% from its most recent peak and deep in bear-market territory, which is defined as a drop of 20% or more from a high.

Other commodities, including copper and lumber, that were being gobbled up in recent years when China was building out a massive infrastructure have also been subject to massive selling and sizable losses as the China growth story changes from a sure thing to fears of a hard landing.

A Thomson Reuters commodity index that tracks a basket of 19 commodities, ranging from cotton to gold, to hogs and coffee and oil, is now trading below where it was at the depths of the financial crisis back in December 2008, according to Oppenheimer's chief investment strategist John Stoltzfus.

The chart of the so-called CRB Commodity Price Index below shows the seven-year low.

"A glut of oil on world markets coupled with slowing demand from China in particular for oil and other commodities has led to the recent pullback in commodity prices," says Stoltzfus. "The CRB index has plunged over 34% from a 2014 peak on June 20 last year through last Friday. The decline in commodities has led to speculation in some corners of the markets that commodities could be signaling the potential for a worldwide recession."