SINGAPORE: Brent crude oil fell over 3 percent on Monday as China’s economic slowdown dented the outlook for demand, with traders placing record bets on even lower prices as they increasingly lose faith in a significant market recovery.
Global benchmark Brent was down over a dollar and more than 3 percent at $32.51 per barrel at 0736 GMT, and U.S. West Texas Intermediate (WTI) crude was down over 2.5 percent at $32.28.
The falls came as speculators increased their net-short positions, which would profit from prices falling lower, to a record high in the week to last Tuesday, in a sign that they are losing faith in a price rise anytime soon.
Traders have also drastically cut their net-long positions which would benefit from higher prices.
Analysts pointed to China’s slowdown, which saw a slide in the yuan and two emergency suspensions in stock trading markets last week, as the main reasons for lower oil and commodity prices.
Morgan Stanley said on Monday that oil prices in the $20s were possible, especially if the dollar surges more against other currencies.
“A 15 percent CNY (Chinese yuan) depreciation alone could send oil into the $20s,” the bank said.
“Oversupply may have pushed oil prices under $60, but the difference between $35 oil and $55 oil is primarily the USD,” it added.
“China macro trends to remain in the driving seat for commodities,” Singapore Exchange (SGX) said on Monday.
“With a slowing domestic economy, mounting deflationary pressures, rising capital outflows, growing credit risks, a continued nationwide anti-corruption drive and rising U.S. interest rates, there is perhaps plenty of scope for volatility to stage a return,” SGX said.
Monday’s decline adds to last week’s more than 10 percent drop in both Brent and WTI prices to start the year. Traders and investors have wondered how long and deep the slide may go with Goldman Sachs saying oil could hit $20 a barrel.
Goldman analysts also said in a note on Friday that sustained lower prices are needed in the first quarter “so producers will move budgets down to reflect $40 a barrel oil for 2016”.
Oil prices have already fallen over 70 percent since the downturn began in mid-2014 as soaring global production sees hundreds of thousands of barrels of crude produced every day without a buyer, leaving storage tanks filled to the brim.
Adding to overproduction is slowing demand, especially in China where growth has dropped to its lowest rate in a generation and experts see few signs of improvement for the next few years.
“Chinese oil data are finally starting to reflect weak economic activity. Implied oil demand in China contracted 4.9 percent (537,300 thousand barrels per day) month-on-month and 2.0 percent (216,700 thousand barrels per day) year-on-year in November, the first decline since July 2014,” Barclays bank said in a note late on Friday.
“We expect further compression in growth rates this year, with an average of 300,000 barrels per day (2.7 percent),” it added.