Bunker Price Slide Set to Continue as Bank of America Merrill Lynch Warns Oil in the $20's Looks Increasingly Likely

The dramatic slide in bunker prices is likely not yet over.

A dramatic slide in bunker prices, that has seen the average price of key grade IFO380 fall some 75 percent in key ports over the last 24 months to their lowest in over a decade, is likely not yet over, according to the latest thinking from an increasing number of analysts.

In the wake of the sliding yuan and two emergency halts in Chinese stockmarket trading this week, brokers say there is not much to prevent oil prices from falling into the mid-$20 range if WTI crude falls below the $32.40 a barrel support level – which it did briefly on January 7.

"The supports are crumbling; there is not a winning long in the market - maximum pain is lower," Robin Bieber, director of the London brokerage PVM Oil Associates, told Reuters Thursday.

To which Bank of America Merrill Lynch stated, "Oil has been under pressure as of late, and downside risks of a dip into the $20s have grown."

An unnamed senior options trader at a major bank noted that some investors, anticipating that Brent will drop below $25 per barrel, are trying to protect themselves by acquiring put options giving them the right to sell at that figure."

"Volatility has been rallying; the action that we have seen shows that people have a bearish slant," they said.

Analysts trying to determine just how far oil can drop point out that prices in the physical markets are plummeting more severely than those in the futures market, and they point to Canadian heavy crude selling below $20 per barrel this week (compared to a production price of $50 per barrel in some cases) as the most alarming example.

While acknowledging that North American producers will probably maintain output in order to pay bills, Abhishek Deshpande, an analyst at banking and investment group Natixis, said, "There is a high risk a lot of these companies could fold, but really speaking we are looking at more consolidation and potential restructuring."

Although six months ago it was greeted with skepticism in some circles, Goldman Sach's prediction of crude dipping as low as $20 per barrel seems to be coming closer to reality. 

Earlier this week, however, Ship & Bunker reported that BP chief executive Bob Dudley said he believes oil will not drop below $30 per barrel.