Morgan Stanley analysts: ‘$20-$25 oil price scenarios are possible due to currency’

According to Morgan Stanley analysts, there is a chance that Brent oil would drop to a low of $20 per barrel if a rapid appreciation occurs in the U.S. dollar.

Oil is an important mineral that makes a country economically viable to the world, and in the United States, it has been dragged down with the rise of the dollar. According to a note from Jan.11 by Morgan Stanley analysts, oil may land between 10 to 25 percent if the U.S. dollar sees a 5 percent increase.

In the reports, the analysts stated, “Given the continued U.S. dollar appreciation, $20-$25 oil price scenarios are possible simply due to currency,” explaining further that, “The U.S. dollar and non fundamental factors continue to drive oil prices.”

Companies like Brent crude witnessed a decline in their yearly sales for the third time in 2015. Things are not looking good for Brent, who has already lost 11 percent in the New Year.

Oil saw a decline last week due to the volatility witnessed in the Chinese markets after the country tried to correct their losses in equities and stabilize their currency. The analysts at Morgan Stanley believe that if the U.S. dollar experiences a 3.2 percent increase, this could lead to 15 percent devaluation in the Chinese Yuan, which could subsequently end up putting crude in a high $20s range.

According to the report, if there is a shift in other currencies, the shift that exists between the dollar and crude could become greater.

At the London-based ICE Europe Exchange that was held on Friday, Brent crude had a closing of $33.55 per barrel; this is the lowest they have gone since June 2004. More declines were experienced on Monday by Brent, as it experienced a 1.6 percent loss to $33.03 in London by 9:16a.m.

This forecast of oil hitting the $20 mark was not foreseen by Morgan Stanley alone. According to Goldman Sachs Group Inc., there is a possibility that storage tanks will exceed their required limit and thereby push crude to a low level that might bring some productions to a quick halt.

Energy Information Administration data tells us that the stockpiles at Cushing, Oklahoma (which is the delivery point for the U.S. benchmark crude and the biggest storage hub in the nation), experienced an expansion in the ninth week up to 63.9 million barrels starting from Jan. 1.

The working capacity of the hub sits at 73 million barrels. U.S. stockpiles still sit at 100 million barrels, which is “above the five-year average.”

We can only hope and pray for the best to happen, and only time will ascertain if these predictions hold some truth or not. The Morgan Stanley analysts believe, “Oil in the $20s is possible, but not for the reasons often cited,” stating that, “It’s not about deteriorating fundamentals.”