A brutal new year selloff in oil markets deepened on Monday, with prices plunging as much as 7% to new 12-year lows as further ructions in the Chinese stock market threatened to knock crude as low as $20 a barrel.
On Monday, China’s blue-chip stocks fell by another 5% and overnight interest rates for the yuan outside of China soared to nearly 40%, their highest since the launch of the offshore market.
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 nearly 15% slide.
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, executives told a Goldman Sachs conference last week.
“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.
Brent crude futures fell $2.15 to $31.40 a barrel, their lowest since April 2004. Brent has fallen more than 15% in six straight days of losses, the worst such slump in a year ago.
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 crude futures dropped $2.05 a barrel to $31.11, 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, a gauge of options premiums based on moves in the U.S. oil exchange traded fund, nearly 12% higher to more than 60—close to its highest level since the 2009 financial crisis.
Nearly 10,500 lots of March $30 puts and 9,500 lots of February $30 puts traded, doubling Friday’s volumes.
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.