Oil prices dropping below $28 a barrel and a weak session on Wall Street have caused Asian markets to slump in morning trade.

Japan’s Nikkei was down 1.9 per cent, while Australia’s S&P/ASX 200 surrendered early gains and fell 0.6 per cent.

Hong Kong’s Hang Seng was 2.4 per cent lower, while on the mainland, the Shanghai Composite was off by 0.2 per cent and the tech-focused Shenzhen Composite was up 0.2 per cent.

In US trading overnight, oil prices initially rebounded, with Brent crude up as much as 5.9 per cent at one point.

But the gains proved unsustainable. West Texas Intermediate, the US oil benchmark, traded as low as $27.92 a barrel this morning after the International Energy Agency’s warning overnight that the oil market “could drown in oversupply”. The lifting of sanctions against Iran will see a rise in output that could offset production cuts elsewhere, they noted.

WTI was down 1.8 per cent at $27.96, but its early tumble saw it trade below $28 for the first time since September 26, 2003. Brent, the international benchmark, was down 0.5 per cent at $28.61. On Monday, Brent traded below the $28 mark for the first time also since September 26, 2003.

According to analysts at Barclays, the market had been hopeful the shale oil industry, whose development in the US has led to a surge in production, would be flexible enough to bring about a rebalancing in 2015, but the “inertia was too great”.

Barclays is sanguine on the prospects for oil, and is advising clients to sell any rallies in the first quarter of this year.

“Geopolitical risks and delays in Iran’s return, combined with current market positioning, might lead to a rapid rebound in prices in the coming months that we do not believe would be fundamentally supported,” they said.

Market jitters were again prompting investors to head for traditional haven assets. Gold was 0.4 per cent stronger at $1,091.38 an ounce.

Similarly, government bond prices were creeping higher. The yield on the benchmark Japanese government 10-year bond, which moves in the opposite direction to price, was down 0.4 basis points at 0.221 per cent. The cautious mood also saw the Japanese yen strengthen 0.3 per cent to Y117.26, making it the best-performing regional currency this morning. Next best was the Taiwanese dollar, up 0.2 per cent, and the Indian rupee, which was flat.

The New Zealand dollar, down 0.6 per cent, was the worst performing Asian currency after data showed inflation slowed to a 0.1 per cent year-on-year pace in the December quarter, its lowest level since the September quarter of 1999. Next weakest were the Korean won, down 0.4 per cent, and the Malaysian ringgit, down 0.3 per cent.

The People’s Bank of China again kept the reference rate for its currency broadly steady at Rmb6.5578 per dollar. It was the ninth session in a row the “fix” for the renminbi was kept relatively stable, given its sharp depreciation at the start of the year spurred volatility and uncertainty in global markets.

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