Oil tumbles 2% on China worries

By Blake Ellis, contributing writer


NEW YORK (CNNMoney.com) -- Oil prices plunged Wednesday on a stronger dollar and amid investor concern that the Chinese government will continue to tighten its credit policy.

What prices are doing: Oil fell $1.87, or nearly 2%, to settle at $77.62 a barrel, after dipping as low as $76.96 a barrel earlier in the session.

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Click on chart to view oil prices.

On Tuesday, oil rose for the first time in six days, recovering from its lowest level so far this year.

What's driving prices: Reports that China has asked major banks to cease lending until the end of the month in order to tighten the country's credit market spooked investors. The news comes a week after the Chinese government raised bank reserve requirements for the first time since 2008.

"This shows us that China is serious about slowing down its explosive demand growth," said Phil Flynn, a senior market analyst at PFG Best. "If the Chinese government continues to take steps to slow the economy, it's going to be bearish for prices in the short term."

Meanwhile, the dollar rose as investors lost their appetite for risk, worrying about China's attempts to slow its economic growth.

"That market seems to be on fire today," he said. "The dollar's incredible strength is definitely going to put pressure on the market."

What analysts are saying: "It's going to be harder and harder to maintain these prices," said Flynn. "There's no doubt the economy is getting better, what is in doubt is whether that translates into $78 to $80 prices for oil."

Flynn said he wouldn't be surprised to see a major sell-off in the next couple of months and he predicts that oil may drop as low as $40 a barrel. To top of page

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