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China Stock Dive Hits Oil, As Euro Crisis, Iran Loom

Oil prices remained under pressure Tuesday as a perfect storm of the Greek debt crisis, strong dollar, expectations of Iranian oil exports and resilient U.S. shale production weighed. But analysts believe China's ongoing stock market meltdown is the biggest driver of crude's slide.

Despite a frenzy of stimulus measures and restrictions on trading, Beijing's failure to stem the stock sell-off has raised fears of follow-on effects to the real economy and added to doubts that policymakers can revive slowing growth. Other commodities also sold off Tuesday, with copper hitting a six-year low.

"China's government has thrown everything but the kitchen sink at the stock market to keep it from collapsing," said Phil Flynn, senior market analyst at the Price Futures Group. "But it hasn't worked.

U.S. crude futures traded below $51 a barrel intraday, closing down 0.4% to $52.33 and off 15% since late June. Prices had surged 40% from March's low, due in part to hopes that China would revive economic growth.

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In April, China became the world's largest importer of crude as it filled its strategic reserve. But oil imports fell 11% in May, year-over-year, the biggest drop since November 2013.

U.S. Shale Adds Pressure

China was expected to account for 30% of global oil demand growth this year, according to Tamar Essner, an energy analyst at Nasdaq Advisory Services. But it may not be able to soak up the supply that's flooding out of the Organization of the Petroleum Exporting Countries.

Meanwhile, the U.S. oil sector may be rebounding from OPEC's push to keep prices low and protect market share. The domestic rig count rose last week for the first time since December, and shale producers have shown surprising tenacity as they cut costs and focus on their most productive fields.

On Tuesday, the Energy Information Administration boosted its outlook on U.S. oil prices to an average of $55.51 a barrel this year, up from an earlier view of $55.35. The EIA also raised its 2015 U.S. production outlook to 9.47 million barrels a day from a prior forecast of 9.43 million.

Iran Priced In, Greece Not

"We have probably seen a bottom on rig counts," Essner said. "U.S. production isn't going to roll over.

Shares of U.S. shale firms like EOG Resources (EOG), Continental Resources (CLR), Sanchez Energy (SN), Concho Resources (CXO) and Laredo Petroleum (LPI) rallied Tuesday.

Greece's effect on oil prices is more secondary, as uncertainty over the euro has investors scrambling for a safe haven in dollars, Essner noted. Because oil contracts are largely denominated in dollars, the currency's appreciation puts downward pressure on crude prices.

But the severity of the Greek crisis, like China's stock collapse, wasn't expected by markets and therefore not priced in, said Flynn, adding that the ripple effects of Greece leaving the eurozone are unknown.

"Markets were caught by surprise that Greece has gotten to this point," he said.

The prospect of Iranian oil returning to world markets, however, was priced in, and any nuclear deal that clears the way for oil exports still has to pass political hurdles, like getting congressional approval.

"People have a sense that if an Iran deal is done we are going to be flooded with oil," Flynn said. "We might not see any Iranian oil on the market in the next year."