Oil rallies but still near 6-1/2-year lows

By Lisa Barrington

LONDON (Reuters) - Oil bounced back from heavy losses on Tuesday but global oversupply and worries about the severity of the economic slowdown in China, the world's top commodity consumer, kept prices near 6-1/2-year lows.

European share markets recovered but Chinese stock markets closed down more than 7 percent, with panic selling intensifying after the Shanghai Composite Index crashed through key support at 3,000 points.

China cut interest rates on Tuesday and lowered the amount of reserves banks must hold in its latest move to stimulate growth, but oil prices barely moved in response.

U.S. crude, also known at West Texas Intermediate or WTI, was up $1.40 at $39.64 a barrel by 1320 GMT, while Brent was up $1.50 at $44.19.

"In the past few days, we have seen a lot of the effects of the equity markets," Petromatrix oil analyst Olivier Jakob said.

"Crude is very oversold," he added.

Oil prices dropped to their lowest since early 2009 on Monday and, despite Tuesday's slight uplift, many analysts think market fundamentals will keep prices low.

"China's economy continues to slow and the (U.S.) Fed may still hike rates before the end of the year. That puts further cracks into the two main growth pillars for the world economy of recent years: Chinese demand (including commodities) and easy money," HSBC's co-head of Asian economics research Frederic Neumann said.

But Neumann said a re-run of Asia's financial crisis in the late 1990s was unlikely.

Daniel Ang at Singapore's Phillip Futures said the rebound for oil could be temporary:

"Both WTI and Brent look like they are on their way to 2008 levels where prices hit a low of $32.4 and $36.2," Ang said.

Goldman Sachs said that while China's turmoil would not lead to a global recession, it did expect the trouble to result in weak commodities.

Beyond Asia's troubles, oil markets have been suffering from oversupply that started pulling down prices in June 2014.

Several members of the Organization of the Petroleum Exporting Countries are producing record volumes of oil in an attempt to squeeze out competition.

Adding to supply glut concerns, OPEC member Iran said on Tuesday it would increase crude production and reclaim its lost export share after international sanctions are lifted, even if prices remain low.

"High OPEC output should help to prevent prices from rebounding sharply even as China fears recede and demand recovers," Capital Economics commodities economist Thomas Pugh said.

(Additional reporting by Keith Wallis and Henning Gloystein in Singapore; Editing by Christopher Johnson and Dale Hudson)