Oil rebounds after sharp losses, but China worries weigh

By Henning Gloystein

SINGAPORE (Reuters) - Crude oil markets recovered more than a percent on Tuesday after a sharp drop in the prior session, although prices held near 6-1/2-year lows as continued weakness in Chinese equities triggered fears of an economic tailspin in the region.

While global markets showed signs of a respite from the recent blood-letting, Chinese shares lost another 5 percent with investors fearing a hard landing of the world's second-biggest economy and top commodity consumer.

"The recent turmoil has left even the most hardened trader

gasping for air. And there's probably more to come," said Frederic Neumann, HSBC's co-head of Asian Economics Research, in a note to clients.

"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," he said, but added that a re-run of Asia's financial crisis in the late 1990s was unlikely.

U.S. crude was up 65 cents at $38.89 per barrel at 0443 GMT, while Brent was up 56 cents at $43.25.

The benchmarks were not far from Monday's lows of $37.75 and $42.23, respectively, weakest since early 2009, suggesting worries over China's economic outlook are now as big as concerns of surplus that have plagued the market for over a year.

Shipping sources said that a potential slowdown in demand was becoming visible in tanker traffic, where the number of very large crude carriers (VLCC) fixed to arrive in Asia fell from 105 in June, to 94 in July and to 83 this month.

West African VLCC-fixtures to Asia halved in August to 18, compared with 36 in July.

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 turmoil, oil markets have been suffering from oversupply that started pulling down prices in June 2014.

The Organization of the Petroleum Exporting Countries is producing record volumes to squeeze out competition especially from U.S. shale producers which, however, have so far been resilient to the resulting price plunges and kept pumping oil.

(Additional reporting by Keith Wallis; Editing by Michael Perry and Himani Sarkar)