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Oil may hit $20 a barrel as China woes continue

The brutal oil market selloff from the New Year became worse on Monday with prices falling by 7% to a new 12 year low with the continuing disturbances in the Chinese stock market threatening to knock the price of crude as low as $ 20.

On Monday, blue chip stocks in China fell by 5% and interest rates outside China went up by almost 40% for the yuan. This is the highest it is has ever been since the offshore market was launched.

Morgan Stanley said that further devaluation may just send oil prices towards the $ 20 – $ 25 per barrel range which would extend the close to 15% slide for the year.

Even though the volatility in China has spooked traders, US drillers say that they are focused on running their wells for as long as they can even though there is a slump.

Tony Headrick, a CHS Hedging LLC energy market analyst said that the focus was still on China with demands concerns continuing in 2016 as well.

Brent crude futures fell by another $ 2.15 to $ 31.40 per barrel which is the lowest they have been since Apr 2004. Brent has already fallen by more than 15% in 6 days of continuous losses. This is its worst slump over the last year.

The West Texas Intermediate crude futures also fell by $ 2.05 to $ 31.11 per barrel. This is its lowest ever point since Dec 2003.

There was a renewed scramble for buy options with bets on a continued slide because of the fierce selling which has sent the CBOE volatility index 12% higher and it is now at its highest level since the financial crisis of 2009.

Clayton Vernon, an economist and trader for Aquivia LLC said that the markets were positioned in a way that traders were now afraid to go long. The push for normalization of things with Iran was the last thing that traders were worried about according to him.

The European Union had said that they may lift sanctions on Iran soon after a deal was struck last year in order to curb their nuclear program. There are a lot of market participants who feel Iran returning to oil markets will only increase the pressure of the global glut which has knocked prices down from +$100 levels in the middle of 2014.

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