Oil drops over 2% as China slowdown weighs; Market loses faith in rebound

Monday's decline adds to last week's more than 10 per cent drop in both Brent and WTI prices to start the year

Crude oil prices fell over 2 per cent on Monday as China's economic slowdown dented the outlook for demand and traders are placing record bets on even lower prices as they increasingly lose faith in a significant market recovery.

Global benchmark Brent was down 89 cents, almost over 2.6 per cent, to $32.66 per barrel at 0319 GMT, and US West Texas Intermediate  crude was down about 2.3 per cent to $32.39.

Monday's decline adds to last week's more than 10 per cent 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 further said in a note on Friday that sustained lower prices are needed to in the first quarter 'so producers will move budgets down to reflect $40 a barrel oil for 2016.'

Other oil market analysts are pointing 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.

"China macro trends to remain in the driving seat for commodities," Singapore Exchange said on Monday in its 2016 commodity outlook.

"With a slowing domestic economy, mounting deflationary pressures, rising capital outflows, growing credit risks, a continued nationwide anti-corruption drive and rising US interest rates, there is perhaps plenty of scope for volatility to stage a return," SGX said.

Oil market speculators have 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, a weekly report from a US government agency that tracks commodity markets activity showed on Friday (see graphic).

At the same time speculators have cut their net-long positions to fewer than 50,000 contracts, or the equivalent of 50 million barrels, according to the trading data. Longs are bets on higher prices, while shorts are wagers that the market will fall.

The net position squares off the two.

Oil prices have already fallen over 70 per cent 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 per cent (537.3 thousand barrels per day) month-on-month and 2.0 per cent (216.7 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 thousand barrels per day (2.7 per cent)," it added.

Image: A petro-industrial factory is reflected in a traffic mirror in Kawasaki near Tokyo December 18, 2014. Photograph: Thomas Peter/Files/Reuters