The rally in Asia stocks fizzled out Friday, as a renewed weakening in the price of oil dampened sentiment and safe haven assets such as the yen received a boost.
US crude fell below $31 a barrel as traders digested news that American stockpiles rose to their highest in more than eight decades, reigniting concerns about demand and broader worries about the global economy.
While turbulence in Asian markets has abated this week with losses earlier in the year being partially won back, investors remain on alert over the global glut in crude and China's economic outlook.
Since the start of the year, tumbling oil prices, concern about the slowdown in Asia's largest economy and a sell-off in bank stocks sent some global stocks into a bear market.
Markets had received welcome support earlier in the week when oil prices jumped Wednesday following a pact between top two producers Russia and Saudi Arabia to pursue a coordinated strategy to limit output.
"Sentiment on the oil market has been a key macro driver for stock-market sentiment recently," Ric Spooner, Sydney-based chief market analyst at CMC Markets, told Bloomberg News.
"Concerns about the potential for credit-market problems in the event of a lower-for-longer oil scenario are near the top of a fairly long list of macro factors worrying investors at the moment."
West Texas Intermediate slipped 0.8 percent Friday after rising in the past two days. Brent also fell 0.8 percent.
"Inventories continue to build," Michael McCarthy, a chief strategist at CMC Markets in Sydney, said by phone, according to Bloomberg. "Not only is there downside risks to prices but there is also obvious limits to any upside potential."
Asia markets were also depressed Friday by a fall on Wall Street Thursday, with Tokyo ending the day down 1.42 percent as a stronger yen dented exporters and the fresh fall in oil hammered commodity and energy shares.
Japanese energy explorer Inpex tumbled 9.40 percent to close at 866.6 yen, while JX Holdings was off more than three percent to end at 447 yen.
- 'Unpredictability about China' -
Analysts noted the strengthening yen -- up slightly to 113.02 yen to the dollar from 113.24 yen Thursday in New York -- could weigh on the profitability of Japanese exporters.
"The stronger yen will be a burden on Japanese markets," Hideyuki Ishiguro, a senior strategist at Okasan Securities, told Bloomberg News.
"Investors are concerned at the downside of earnings, especially for exporters, which may weigh down the markets.
We're not in a place where we can buy. The yen may strengthen further versus the dollar."
The currency has climbed almost five percent since the Bank of Japan surprised traders by imposing negative interest rates last month.
Elsewhere in Asia-Pacific, Hong Kong eased 0.54 percent in late trade while Sydney dropped 0.79 percent, but Seoul rose 0.39 percent.
Energy firms suffered, with Sydney-listed Woodside Petroleum down 2.26 and BHP Billiton dropping 2.01 percent. In Hong Kong, CNOOC was 1.46 percent lower while PetroChina lost 1.36 percent.
In Shanghai stocks were broadly flat, slipping 0.10 percent amid persistent worries over the flagging economy, dealers said.
Despite the slight fall Friday, China’s stocks enjoyed one of their best weeks for months after the government signalled increased support for the economy through higher spending and new measures to boost bank lending.
Uncertainty about China's slowdown has added to bearish sentiment in financial markets this year as Beijing has sent mixed signals about managing the currency and stock markets.
"Since last summer's stock market debacle, the market's confidence in Chinese leaders' ability to govern their economy has been badly shaken and it has yet to be repaired," said Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies in Washington, according to Bloomberg.
"The longer this situation lasts, the greater potential damage the unpredictability about China´s economic situation could have on global markets."
- Key figures around 0730 GMT -
Tokyo - Nikkei 225: DOWN 1.42 percent at 15,967.17 (close)
Shanghai - composite: DOWN 0.10percent at 2,860.02 (close)
Hong Kong - Hang Seng: DOWN 0.54 percent at 19,257.94
Euro/dollar: UP at $1.1120 from $1.1105 on Thursday
Dollar/yen: DOWN at 113.02 from 113.24 yen on Thursday
New York - Dow: DOWN 0.3 percent at 16,413.43 (close)
London - FTSE 100: DOWN 1.0 percent at 5,971.95 points (close)