Morgan Stanley says crude can drop to $20 a barrel

Hong Kong: A rapid appreciation of the United States dollar may send Brent oil as low as $20 a barrel, according to Morgan Stanley.
Oil is particularly leveraged to the dollar and may fall between 10 to 25 per cent if the currency gains 5 per cent, Morgan Stanley analysts including Adam Longson said in a research note dated January 11. A global glut may have pushed oil prices under $60 a barrel, but the difference between $35 and $55 is primarily 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 analysts wrote in the report. "The US dollar and non- fundamental factors continue to drive oil prices."
Crude tumbled last week on volatility in Chinese markets after the country sought to quell losses in equities and stabilise its currency. A 3.2 per cent increase in the US dollar — as implied by a possible 15 per cent yuan devaluation — may drive oil down 6 to 15 perc ent, which could put 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 2.7 per cent to $32.64 in London.
Oil at 11-year low
Crude extended its slide from an 11-year low, confirming the view of hedge funds that cut bullish price bets to the lowest since 2010.
Futures fell as much as 2.8 per cent in New York after dropping more than 10 percent last week. Speculators’ net-long position in West Texas Intermediate fell 24 per cent in the week ended on January 5, data from the US Commodity Futures Trading Commission show. Producer prices in China fell for a record 46th month and inflation remained at about half the government’s 2015 target, fueling concern of further weakness in the world’s biggest energy user.
"Sentiment indicators are all to the extreme sell," Michael McCarthy, a chief strategist at CMC Markets in Sydney, said by phone. "Until we see a supply-side response, the potential for significantly higher prices is low."
Oil slumped last week as volatility in Chinese markets fueled a rout in global equities and U.S. stockpiles remained about 100 million barrels above the five-year average. Saudi Arabian Oil Company, the world’s biggest crude exporter, confirmed on Friday it was studying options for a share sale, including listing "a bundle" of refining subsidiaries, according to a statement from the state-owned company.