Oil down; China, Wall Street tumble erase early rally on Middle East

Oil prices weakened on Monday in volatile trade.

New York: Oil prices weakened on Monday in volatile trade, erasing an early rally as concern about Middle East tensions gave way to worries about slowing global economic growth and sliding stock markets.

U.S. crude prices were also pressured by worries that record inventories could swell further at the Cushing, Oklahoma delivery hub. Floods in the Midwestern United States prevented oil from getting to some refineries last week. 

Brent , the global oil benchmark, was down 20 cents, at $37.08 a barrel by 1:40 p.m. EST (1840 GMT). In early trade, Brent hit $38.99, its highest in nearly three weeks.

U.S. crude`s West Texas Intermediate (WTI) futures fell 30 cents, to $36.74. It had traded as high as $38.39.

WTI also weakened after data from market intelligence firm Genscape showed a build of more than 480,000 barrels in Cushing supply for the week to Jan. 1, traders who saw the data said.

Two pipelines that feed Phillips 66`s Wood River refinery in Illinois closed briefly last week due to caution about the floods, which rekindled memories of a deluge five years ago that affected 13 percent of U.S. refining capacity.

Global equity markets fell on Monday on renewed worries about global growth after Chinese shares slid 7 percent slide after weak economic data. Wall Street`s S&P 500 stock index fell about 2 percent. 

In early trade, oil rallied after a breakdown in diplomatic ties between Saudi Arabia and Iran fed worries about Middle East crude shipments.

"The Saudi-Iran standoff is certainly one to worry over given its ramifications for oil supply," said Phil Flynn, analyst at the Price Futures Group brokerage in Chicago.

"But the equity markets sell off is more pressing and difficult to ignore because of the impact of China on the global economy and overall demand for oil." Surveys in China showed factory activity in the No. 2 economy slumped in December. A 7 percent slide in Chinese shares triggered a trading halt.

The clash between Saudi Arabia and Iran comes as Tehran, which holds some of the largest proven reserves, hopes to ramp up oil exports once sanctions come off against Iran`s controversial nuclear programme.

Energy Aspects analyst Richard Mallinson said the market is grappling with the question of "where next in the Saudi Arabia/Iran stand-off? I think President (Hassan) Rouhani on the Iranian side would like to calm things down and push for no further escalation."