OIL prices fell nearly 4 percent to below US$70 a barrel yesterday as a steep drop in China's stock market raised doubts about the strength of the U.S. and global economic recovery.

Benchmark crude for October delivery lost US$2.78 to settle at US$69.96 on the New York Mercantile Exchange, the first time oil has ended a trading day below US$70 in about two weeks.

"It's just a market that doesn't want to stray too far from US$70 a barrel," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. "It looks like we're probably going to finish this month about where we started, and about where we started the summer."

China raised some red flags last week as government officials seemed to suggest they would cut back on bank lending in coming months, essentially removing one of the stimuli they have added to the Chinese economy, said PFGBest analyst Phil Flynn.

The Shanghai Composite Index plunged 6.7 percent on yesterday, adding to a nearly 3 percent drop on Friday, on concerns of a tightening in bank lending.

"The market is concerned whether or not the Chinese government can engineer a soft landing," Flynn wrote in his morning report. "How will the futures markets react as they start to remove this historic stimulus?"

Major refiner China Petroleum & Chemical Corp. fell by the daily maximum 10 percent after the company said it does not expect to significantly boost production, while PetroChina, the Shanghai index's heaviest weighted share, fell 6.7 percent.

Commodities also took a hit yesterday from a strengthening in the dollar.

Oil has traded near US$70 a barrel for most of the last few months as investors struggle to gauge how robust the U.S. recovery will be.

Crude has tried and failed several times to break through the US$75 level, but key fundamentals remain bearish.

The U.S. Energy Department last week said that U.S. crude stockpiles rose by 200,000 barrels for the week ended Aug. 21. The previous report showed a large and unexpected draw on oil, which sent prices soaring.

Ahead of an OPEC meeting in Vienna next month, oil ministers from the group have indicated they will not push for output cuts - a sentiment reinforced by a weekend decision of the United Arab Emirates' main oil exporter to sell more crude and ease up on OPEC-led supply curbs.

Ritterbusch said he's not anticipating any pre-holiday uplift in energy prices, as fewer drivers are expected to hit the road for Labor Day.

In other Nymex trading, gasoline for September delivery fell 7.59 cents to settle at US$1.9859 a gallon and heating oil dropped 8.11 cents to settle at US$1.7792 a gallon. Natural gas shed 5.6 cents to settle at US$2.977 per 1,000 cubic feet.

In London, Brent crude settled down US$3.14 at US$69.65.