Oil dive deepens to 12-year low; $20 warning on China

Mon Jan 11, 2016 4:50pm EST
 
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By Catherine Ngai

NEW YORK (Reuters) - A brutal new year selloff in oil markets quickened on Monday, with prices plunging 6 percent 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.

The latest catalyst was a further 5 percent decline in China's blue-chip stocks and a surge in overnight interest rates for the yuan outside of China to nearly 40 percent, 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 percent 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.

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.   Continued...

 
An oil pump jack can be seen in Cisco, Texas, August 23, 2015.   REUTERS/Mike Stone