The Panamanian-flagged MV Tycoon split in two and is now sitting on the seabed in Flying Fish Cove after breaking its moorings on Saturday and smashing into rocks.
Teams of volunteers are continuing to work around the clock to clean up tonnes of oil leaking from the cargo ship, which was also carrying phosphate.
Experts fear that most of the 105 tonnes of heavy fuel on board has leaked into the sea.
A 60-metre stretch of beach has already been badly affected, with sand and animals covered in oil.
Environmental scientist Dr Nic Dunlop, who works with the Conservation Council of Western Australia and lived on Christmas Island for several years, says the timing is terrible.
"It is difficult to imagine a more sensitive place and time for something like this to happen," he said.
"Only a small amount of oil would have been enough to devastate the local environment. In this case the ship has literally split in half, dumping most of its fuel load into the bay. It's hard to overestimate how damaging this will be for local fauna."
He says the red crabs - described by David Attenborough as one of the world's "greatest wildlife spectacles" - are currently returning to shore on Christmas Island and the new generation may be wiped out by the oil slick.
"It's also peak season for whale sharks. Plus, the area is home to a number of rare bird species, including the abbott's booby, which breeds nowhere else in the world," he said.
Flying Fish Cove is expected to be the area most impacted by the oil spill, with particular concern for the north coast coral reef and the land crab settlement.
SUFFICIENTLY SEAWORTHY?
Questions have also been raised about whether the ship, which was last inspected in October, was sufficiently seaworthy to enter Australian waters.
But the Australian Maritime Safety Authority's Toby Stone says there were only minor deficiencies and they were corrected before the ship sailed.
"The bad news is that there could be no containment operation because of the very severe swell and weather conditions," he said.
"There's a positive side to that - the bad weather has helped to break up and disperse a lot of the oil naturally."
But Dr Dunlop says only time will tell. He says port authorities have to answer "very tough questions" about why the ship was left on its moorings at the loading dock with the heavy swell forecast.
"Any inquiry that only looks at the condition of the ship without investigating the port authority won’t be good enough," he said.
"Four-metre swell is hardly unusual in the area and as we’ve seen, is more than enough to tear apart a ship like the Tycoon.
"There’s no doubt that this is a man-made catastrophe but as usual, it’s the environment that is paying the price."
Dr Dunlop says it is the first major oil spill in the area since ships were torpedoed there in WWII.
Volunteers are expected to help with the clean-up for the next week, and authorities say it is unclear when it will be safe to remove the wreck.
