A rapid appreciation of the U.S. dollar may send Brent oil to as low as $20 a barrel, according to Morgan Stanley.
Oil is particularly leveraged to the dollar and may fall 10% to 25% if the currency gains 5%, Morgan Stanley analysts including Adam Longson said in a research note dated Jan. 11. A global glut may have pushed oil prices under $60 a barrel, but the difference between $35 and $55 is primarily the U.S. dollar, according to the report.
“Given the continued U.S. dollar appreciation, $20-$25 oil price scenarios are possible simply due to currency,” the analysts wrote in the report. “The U.S. dollar and non- fundamental factors continue to drive oil prices.”
Brent crude capped its third annual decline in 2015 and has already lost more than 11% so far this year. The Organization of Petroleum Exporting Countries effectively abandoned output limits in December, potentially worsening a global glut, while U.S. stockpiles remain about 100 million barrels above the five-year average.
Oil tumbled last week on volatility in Chinese markets after the country sought to quell losses in equities and stabilize its currency. A 3.2% increase in the U.S. dollar — as implied by a possible 15% 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.
Brent crude closed at $33.55 a barrel on the London-based ICE Futures Europe exchange on Friday, the lowest settlement since June 2004. Prices extended their declines Monday, losing 1.6% to $33.03 at 9:16 a.m. in London.
Morgan Stanley is not the first to forecast a drop to $20 oil, but its reasons differ from other banks. Goldman Sachs Group Inc. has said there’s a possibility storage tanks will reach their limit, pushing crude down to levels necessary to force an immediate halt to some production.
Stockpiles at Cushing, Oklahoma, the delivery point for U.S. benchmark crude and the nation’s biggest oil-storage hub, expanded for a ninth week to 63.9 million barrels through Jan. 1, according to Energy Information Administration data. The hub has a working capacity of 73 million barrels.
“Oil in the $20s is possible, but not for the reasons often cited,” Morgan Stanley said. “It’s not about deteriorating fundamentals.”
--- Check out Bob Doll’s 10 Predictions for 2016 on ThinkAdvisor.