How deep is the well? Oil slump continues as prices drop more than 6 per cent to 12 year lows

  • On Monday prices plunged 6 per cent to new 12-year lows 
  • While further ructions in the Chinese stock market threatened to knock crude as low as $20 a barrel
  • Monday's dive, the biggest one-day loss since September - triggered rash of panicky trading across the market
  • Latest catalyst was a further 5 per cent decline in China's blue-chip stocks and surge in overnight interest rates for the yuan to nearly 40 per cent
  • Drillers in the United States say they are focused on keeping their wells running as long as possible, despite the slump

By REUTERS

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A brutal new year selloff in oil markets quickened on Monday, with prices plunging 6 per cent to new 12-year lows as further ructions in the Chinese stock market threatened to knock crude as low as $20 a barrel.

Amid an accelerating tailspin that shows no sign of slowing, Monday's dive - the biggest one-day loss since September - triggered a rash of panicky trading across the market.

Long-term futures contracts for 2017 and beyond fell nearly as hard as those for immediate delivery as some producers rushed to hedge, while a key options gauge surged to nearly its highest since 2009.

Traders at the New York Stock Exchange after the opening bell of the trading session on Thursday. A brutal new year selloff in oil markets quickened on Monday, with prices plunging 6 per cent to new 12-year lows as further ructions in the Chinese stock market threatened to knock crude as low as $20 a barrel

Traders at the New York Stock Exchange after the opening bell of the trading session on Thursday. A brutal new year selloff in oil markets quickened on Monday, with prices plunging 6 per cent to new 12-year lows as further ructions in the Chinese stock market threatened to knock crude as low as $20 a barrel

The latest catalyst was a further 5 per cent decline in China's blue-chip stocks and a surge in overnight interest rates for the yuan outside of China to nearly 40 per cent, their highest since the launch of the offshore market. 

Technical and momentum selling added fuel to the selloff.

Morgan Stanley warned that a further devaluation of the yuan could send oil prices spiraling into the $20-$25 per barrel range, extending the year's 15 per cent slide.

'The focus is still on China and the demand concerns in China moving forward into 2016,' said Tony Headrick, an energy market analyst at CHS Hedging LLC.

While China's volatility is spooking traders over the outlook for demand from the world's No. 2 consumer, drillers in the United States say they are focused on keeping their wells running as long as possible, despite the slump.

Amid an accelerating tailspin that shows no sign of slowing, Monday's dive triggered a rash of panicky trading across the market

Amid an accelerating tailspin that shows no sign of slowing, Monday's dive triggered a rash of panicky trading across the market

U.S. shale output is expected to decline by 116,000 barrels per day in February versus the month before, the same rate as January's estimated drop and a slower pace than many had expected months ago, the Energy Information Administration said.

Brent crude futures LCOc1 fell $2.00 to settle at $31.55 a barrel, their lowest since April 2004. 

Brent has fallen more than 15 per cent in six straight days of losses, the worst such slump in a year.

Long-dated Brent crude prices for 2017 and 2018 fell nearly as hard as the tumbling front-month contract on Monday amid a scramble of producer hedging, according to dealers.

U.S. West Texas Intermediate (WTI) crude futures CLc1 fell $1.75 to settle at $31.41 a barrel, the lowest since December 2003.

The fierce selling triggered a renewed scramble to buy options betting on a further slide, sending the CBOE volatility index .OVX, a gauge of options premiums based on moves in the U.S. oil exchange traded fund, over 13 per cent higher to more than 63 - close to its highest level in seven years.

Nearly 17,000 lots of March $30 puts CL300O6 and 18,000 lots of February $30 puts CL300N6 traded, doubling Friday's volumes.

An investor looks at an electronic screen showing stock information at brokerage house in Hangzhou, Zhejiang Province, China on Monday, when China stocks closed down at their lowest since September

An investor looks at an electronic screen showing stock information at brokerage house in Hangzhou, Zhejiang Province, China on Monday, when China stocks closed down at their lowest since September

The markets are positioned in a way where 'traders are afraid to be long,' said Clayton Vernon, a trader and economist with Aquivia LLC in New Jersey. 

'The firm push for normalization with Iran has taken the last shred of geopolitical risk out of traders' minds.'

The European Union said on Monday that the lifting of sanctions on Iran could come soon, following a deal last year to curb the Middle East nation's nuclear program. 

Many market participants say that Iran's return to the oil markets would add more pressure to the global glut that has knocked prices from more than $100 in mid-2014.

Speculators cut their net long position to the smallest since 2010, with short positions rising in a sign that they are losing faith in a price rise any time soon.

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