Oil Prices May Head to $20/bbl on USD Strength: Morgan Stanley

Morgan Stanley warns oil’s dismal start to the new year may continue, the commodity is seen heading to as low as $20.

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Given the continued US dollar appreciation, $20-25 oil price scenarios are possible, says Morgan Stanley. (Photo: AP)

A rapid appreciation of the US dollar may send Brent oil to as low as $20 a barrel, according to Morgan Stanley, reports Bloomberg.

In a research note dated 11 January, Morgan Stanley analysts including Adam Longson said, “oil is particularly leveraged to the dollar and may fall between 10 to 25 percent if the US dollar gains 5 percent”. A global glut may have pushed oil prices under $60 a barrel, but the the decline from $55 to $35 was primarily led by the US dollar, according to the report.

Given the continued US dollar appreciation, $20-25 oil price scenarios are possible simply due to currency. The US dollar and non-fundamental factors continue to drive oil prices.

Morgan Stanley Note

Brent crude has already lost more than 11 percent so far this year. The Organization of Petroleum Exporting Countries (OPEC) effectively abandoned output limits in December, potentially worsening the pile up in crude oil inventories globally. In the US stockpiles remain about 100 million barrels above the five-year average.

Oil prices plunged last week on the return of volatility in Chinese markets.

A 3.2 percent increase in the US dollar – as implied by a possible 15 percent yuan devaluation – may drive crude in the high $20s, Morgan Stanley said.

If other currencies move as well, the shift by both the dollar and oil could be even greater, according to the report.

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