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.