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Oil

Oil seen heading to US$20

A rapid appreciation of the U.S. dollar may send Brent oil to as low as US$20 a barrel, according to Morgan Stanley.

Oil is particularly leveraged to the dollar and may fall between 10 per cent and 25 per cent if the currency gains five 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 U.S. dollar, according to the report.

“Given the continued U.S. 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.”

Brent crude capped its third annual decline in 2015 and has already lost more than 11 percent so far this year. The Organisation 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 stabilise its currency. A 3.2 percent increase in the U.S. dollar — as implied by a possible 15 per cent yuan devaluation — may drive 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 on January 11, losing 1.6 per cent to US$33.03 at 9:16 a.m. in London.

Storage tanks

Morgan Stanley is not the first to forecast a drop to US$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 January 1, according to Energy Information Administration data. The hub has a working capacity of 73 million barrels.

“Oil in the US$20s is possible, but not for the reasons often cited,” Morgan Stanley said. “It’s not about deteriorating fundamentals.” — Bloomberg/GB

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