Oil Drops for Sixth Day, at 12-year Lows

Fund managers dump long positions, set record bets on falls; analysts eye oil below $30.

Oil prices fell for a sixth session to trade at almost 12-year lows on Monday as concerns about China's economic slowdown, reflected in a renewed slide in its stock markets, weighed on the outlook for demand this year.

Traders increased bets against any near-term recovery in the oil price and Brent crude futures were down by 63 cents at $32.92 a barrel by 1200 GMT, off 15 percent in a week. U.S. West Texas Intermediate (WTI) crude futures fell 48 cents to $32.68.

Speculators increased their net short positions to a record high in the week to last Tuesday, data showed on Friday, in a sign that they are losing faith in a price rise any time soon.

Analysts pointed to China's economic slowdown, which has seen the yuan weaken and two emergency suspensions in Chinese equity markets last week, as the main reasons for lower oil and commodity prices.

On Monday, turbulence gripped Chinese markets again, as blue-chip stocks fell by another 5 percent and overnight interest rates for the yuan outside of China soared to nearly 40 percent, their highest since the launch of the offshore market.

"If the first week is anything to go by we are in for a long, volatile and very exhausting year. The week started on a bad note and ended on a good one but the market response, worryingly, was the same to both - sell, sell, sell," David Hufton, of oil brokers PVM Oil Associates, said in a note.

"China has torpedoed the hopes of the optimists. The third leg of the financial crises involving emerging markets that the IMF, World Bank, BIS and various messengers of doom had warned of has come into play," he said.

Morgan Stanley (MS) 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.

Monday's decline adds to last week's more than 10 percent drop in both Brent and WTI prices and analysts believe the pain for producers will intensify in the early part of this year.

Goldman Sachs has maintained for over a year that it may take a drop towards $20 to flush out enough higher-cost output to rebalance the market.

Oil prices have fallen by more than 70 percent since the downturn began in mid-2014 as rising global production sees hundreds of thousands of barrels of crude produced every day without a buyer.

This imbalance looks set to increase this year as Iran brings barrels back to global markets and other countries such as Iraq and Russia pump at, or near, record levels.

"If you actually look at how low (prices) need to go to hit variable-cost production, then you need a two-handle on crude and we could well be in that world now," Citi head of energy research Seth Kleinman said.

"Q2 looks brutal. You could have refiners coming offline, just as Middle East production comes back online, including Iran."

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.

By Amanda Cooper