Dollar strength could see oil hit $20 – Morgan Stanley

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.