Morgan Stanley sees US$20 a barrel oil on US dollar appreciation

[HONG KONG] A rapid appreciation of the US dollar may send Brent oil as low as US$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 Jan 11. A global glut may have pushed oil prices under US$60 a barrel, but the difference between US$35 and US$55 is primarily the US dollar, according to the report.

"Given the continued US dollar appreciation, US$20-US$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 stabilize 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 per cent, which could put crude in the high US$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 US$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 US$32.64 at 8:10 am in London.

BLOOMBERG