Brent crude prices came crashing down on Thursday, falling over 4 percent to the lowest level seen since April 2004, following a rocky session in Asia after China accelerated the pace of the devaluation of its currency which drove its markets into a tailspin as shares plunged over 7 percent and triggered circuit breakers to kick in and thus halt the day’s trading for the second time this week.
Oil prices have been dragged down amid a large supply overhang as oil producing countries continue to pump and output levels are at near-records.
The price of oil has now crashed a mind-boggling 70 percent since the downturn started in June 2014, causing significant pain to companies and economies that rely heavily on oil revenues.
China surprised markets on Thursday by accelerating the devaluation of the yuan to its lowest level in nearly five years.
China’s Central Bank, The People’s Bank of China (PBOC) set the official midpoint rate of the currency at 6.5646 yuan per dollar, the lowest level since March 2011.
The midpoint rate set was 0.5 percent weaker than the previous day and was the biggest daily drop since August 2015, when the PBOC made a surprise move with a near 2 percent devaluation of the currency which also roiled global markets.
The move sent regional currencies tumbling, as investors fear a “currency war” as China starts a virtual trade war against its competitors.
A sustained depreciation in the yuan puts pressure on other Asian countries to devalue their currencies in order to stay competitive with China’s massive export machine, which is becoming a very serious concern to investors and rattling markets early in 2016.
Following China’s devaluation move, markets came crashing down.
China’s recently installed circuit breaker mechanism paused trading for 15 minutes after the CSI300 index fell 5 percent in the first 13 minutes of trading. Upon resumption of trading it fell further, triggering the day’s halt on trading for the second time this week.
And to conclude a 29 minute day of trading in China: the CSI300 index finished down 7.2 percent, the Shanghai composite index fell 7.3 percent, and Shenzhen index dropped by 8.3%.
U.S. index futures sank overnight going into Thursday morning — the DJIA, S&P500, and NASDAQ all fell over 1 percent.
“Markets are nervous — in essence they don’t trust the policy makers in China,” said George Boubouras, chief investment officer at Contango Asset Management in Melbourne. “Investors don’t like the concept of a fast-depreciating yuan, so there’s a lack of confidence.”
As finance markets in Asia came tumbling down, the global benchmark Brent mirrored the same fall, shedding 4 percent to reach a low of $32.75 per barrel shortly after 0600 GMT, a level which hasn’t been seen since April 2004.
“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.
The continued plunge in the price of oil comes on the back of near-record output from major oil producers such as the Organization of the Petroleum Exporting Countries (OPEC), Russia and North America, which has left storage tanks overflowing with supplies.
The plunge in prices is also causing economic havoc for countries that rely heavily on oil export revenues, such as Saudi Arabia, whom recently slashed their budget and hiked fuel prices.
Saudi’s 5-year credit default swaps (CDS) have more than tripled since late 2015 to over $180.
Oil market woes have been further been exacerbated by weakening demand, particularly in Asia, as China, the number two oil consumer, is seeing its economy slow to the most 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.
“We think low $30s (per barrel) is a floor, but once positioning gets so biased anything can happen,” said Virendra Chauhan, an analyst at Energy Aspects in Singapore.
In the U.S., West Texas Intermediate (WTI) futures were also down around 4 percent to $32.53 per barrel, a December 2008 low. Should prices fall below $32.40 WTI, like Brent, will be at levels that haven’t been seen since 2004.