Brent crude futures fell to a fresh 11-year low on Thursday as a sliding yuan and an emergency halt in China’s stock trading left Asian markets in a turmoil, while a huge supply overhang and near-record output levels also continued to drag on oil prices.
China accelerated the devaluation of the yuan on Thursday, sending currencies across the region reeling and domestic stock markets tumbling, as investors feared the Asian giant was kicking off a virtual trade war against its competitors.
Trading on its stock markets was suspended for the rest of the day, the second time this week, and China’s securities regulator intervened heavily by issuing rules to restrict share sales by listed companies’ major shareholders.
Tracking the weakness across financial markets, the global benchmark Brent LCOc1 fell to $33.09 per barrel, the weakest since 2004 and below the previous 11-year low from Wednesday. Prices, however, edged back to $33.42 by 0440 GMT (11.40 p.m. ET Wednesday).
“With oil markets producing 1 million barrels a day in excess (of demand) and very little sign of any rational response from the supply side, it’s little wonder we’re seeing pressure again,” said Michael McCarthy, chief market strategist at CMC Markets in Sydney.
Global oil prices have crashed 70 percent since mid-2014 as near-record output from major producers such as the Organization of the Petroleum Exporting Countries (OPEC), Russia and North America has left storage tanks brimming with supplies.
Exacerbating the oil market woes is a weakening demand, especially in Asia, home to the world’s No.2 oil consumer, China, that is seeing the slowest economic growth in a generation.
“The Chinese economy actually contracted in December and that’s adding fire to fears of a more rapid slowdown in the world’s second biggest economy,” McCarthy said.
Financial markets fear the yuan’s rapid depreciation may accelerate, which would mean China’s economy is even weaker than had been imagined. Offshore yuan CNH=D3 fell to a fresh record low on Thursday since trading started in 2010. [MKTS/GLOB]
With the global economy looking shaky due to China’s slowdown, analysts said the outlook for oil remains for cheap prices for much of this year.
“We think low $30’s (per barrel) is a floor, but once positioning gets so biased anything can happen,” said Virendra Chauhan, analyst at Energy Aspects in Singapore.
In the United States, West Texas Intermediate (WTI) futures CLc1 set fresh 2009 lows of $32.77 per barrel, with prices crawling back to $33.17 by 0440 GMT.
Analysts said a buildup in U.S. stockpiles was the main reason for the drop in WTI prices.
“The U.S. inventory numbers showed a 16 million increase in distillates and other products, so it’s clear they’re still producing at rates that are unsustainable,” McCarthy said.
The huge storage overhang means that even if U.S. production falls this year as drillers succumb to low prices, it will take many months to work down excess supplies.