Oil hits four-month low on China stock market dive, supply concern

By Barani Krishnan

NEW YORK (Reuters) - Crude oil futures hit four-month lows on Monday after a steep drop in China's stock markets sparked concern about the economic health of the world's biggest energy consumer, while evidence of a growing crude glut mounted.

Oil was also pressured by a sharp increase in U.S. drilling activity with data on Friday showing producers added 21 rigs last week, the most in over a year, suggesting a ramp up in output as crude futures recovered from six-year lows seen in the first quarter.

A weaker dollar (.DXY) on Monday cushioned some of oil's losses as crude and other commodities denominated in the greenback saw higher demand from users of the euro (EUR=). [FRX/]

Chinese stocks tumbled more than 8 percent in Asian trading, the biggest one-day drop in eight years, driving European equities markets to a two-week low.

Brent crude oil (LCOc1) settled down $1.15, or 2 percent, at $53.47 a barrel. In post-settlement, it fell to as low as $52.90, its lowest since mid-March.

U.S. crude (CLc1) closed down 75 cents, or 1.6 percent, at $47.39. It fell below $47 post-settlement, the lowest since late March.

"The combination of the Chinese stock market rout and creeping crude glut is weighing on oil," said Carl Larry, director of business Development for oil and gas at Frost & Sullivan.

"That said, Brent's still seeing support above $50 and U.S. crude is staying above $45. There's a lot of hedging going on at those levels."

Global oil supplies remain ample, with major producers in the Middle East Gulf competing for market share and pumping 2-3 percent more than needed, analysts say.

Exports from Iraq's southern oilfields were on track for a monthly record, having topped 3 million barrels per day so far this month.

"In the next couple of months, even if the global oversupply and seasonal weakness are becoming priced in, it is difficult to see where any price uplift will come from," said Societe Generale oil analyst Michael Wittner.

Speculators have cut their bets on a longer-term rise in oil prices, InterContinental Exchange data showed. Hedge funds and other money managers slashed their net long positions in Brent for the first time in four weeks in the week to July 21.

Investors will also look to the U.S. Federal Reserve for direction this week. The Fed starts a two-day policy meeting on Tuesday amid speculation of a September rate hike that could boost the dollar.

(Additional reporting by Karolin Schaps in London and Keith Wallis in Singapore; Editing by Marguerita Choy; and Peter Galloway)