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Dollar strength could see oil hit $20 – Morgan Stanley

Dollar strength could see oil hit $20 – Morgan Stanley

US bank warns of further declines if the currency’s strength continues

US bank Morgan Stanley has added to the growing number of voices warning that oil prices could drop as low as $20 a barrel.

In late trading yesterday, global oil market Brent fell by more than $2 to $31.48 a barrel, a level last reached in April 2004.

Morgan Stanley analyst Adam Long said in a research note dated January 11 that oil’s link to the dollar could lead to further declines of between 10 to 25 per cent if the currency gains 5 per cent.

According to the report, the current strength of the US dollar was the primary reason oil prices had dropped under $55, with a global glut only responsible for pushing oil under $60.

“Given the continued US dollar appreciation, $20-$25 oil price scenarios are possible simply due to currency,” it was noted in the report. “The US dollar and non-fundamental factors continue to drive oil prices.”

Oil declined last week due to volatility in Chinese markets.

A possible 15 per cent devaluation of the yuan could increase the strength of the US dollar by 3.2 per cent and drive crude into the high $20s, Morgan Stanley said.

The US bank’s reason for a drop to $20 oil differed to its peers. Previously Goldman Sachs Group warned there was a possibility of oil reaching $20 a barrel, but it reasoned that storage tanks reaching their limit, halting production, would be the cause rather than currency issues.

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