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

Morgan Stanley Southeast Asia investment banker Nehchal Khanna is leaving the firm after more than five years, according to people with knowledge of the matter.

[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.

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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.