Oil tumbles nearly 5 pct to new lows; analysts warn of $20s

By Catherine Ngai and Amanda Cooper

NEW YORK/LONDON (Reuters) - A brutal new year selloff in oil markets deepened on Monday, with prices plunging as much as 5 percent to new 12-year lows as further ructions in the Chinese stock market threatened to knock crude into the $20s.

On Monday, China's 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.

Morgan Stanley warned that a further devaluation of the yuan could send oil prices spiralling lower still, extending the year's nearly 15 percent slide.

While China's ructions are spooking traders over the outlook for demand from the world's No. 2 consumer, drillers in the United States say they are focused are keeping their wells running as long as possible, despite the slump, executives told a Goldman Sachs conference last week.

Brent crude futures fell $1.75 to $31.80 a barrel by 11:34 a.m. EDT (1634 GMT), their lowest since April 2004.

U.S. West Texas Intermediate (WTI) crude futures dropped $1.50 to $31.66 a barrel, the lowest since December 2003.

The markets are positioned in a way where "traders are afraid to be long," said Clayton Vernon, a trader and economist with Aquivia LLC in New Jersey. "The firm push for normalization with Iran has taken the last shred of geopolitical risk out of traders' minds."

The European Union said on Monday that the lifting of sanctions on Iran could come soon, following a deal last year to curb the Middle East nation's nuclear program. Many market participants that Iran's return to the oil markets would add more pressure to the global glut that has knocked prices from more than $100 in mid-2014.

Even so, many big investors are still shifting more of their bets to the bearish side of the market. Speculators cut their net long position to the small since 2010 in the week to last Tuesday, with short positions rising in a sign that they are losing faith in a price rise any time soon.

(Additional reporting by Henning Gloystein in Singapore; Editing by Marguerita Choy)