Morgan Stanley warns oil prices could fall to $20 per barrel due to a strong US dollar

Jessica Morris
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Goldman Sachs has also warned oil could fall to $20 per barrel (Source: Getty)

Foreign exchange rate movements could send Brent crude oil as low as $20 per barrel, investment bank Morgan Stanley has warned.

In a research note sent out today, it said oil prices could fall between 10 to 25 per cent if the US dollar gains five per cent.

While the widening gap between supply and demand may have pushed oil under $60 per barrel, the difference between $35 and $55 is primarily in the greenback, Morgan Stanley said.

Read more: Oil prices slump amid anxiety over China

The investment bank added that a 15 per cent appreciation in the Chinese yuan alone could send oil into $20 per barrel territory.

Between June last year and the beginning of 2016, Brent crude dropped from over $110 per barrel to around $37. Oil has fallen even lower this year, with Brent and US crude both trading at around $31.8 per barrel. It's been hurt by Opec's failure to agree a production ceiling at its meeting in December, and growing concern over the pace of Chinese economic growth.

But Morgan Stanley stressed that the reason it believes oil could fall as low as $20 per barrel is different to theories put forward by other market mavens.

Goldman Sachs has said oil could fall to this level if storage tanks reach their limit, depressing prices to the extent that some producers would have to stop production. At the same time, it assigned a fairly low probability to this doomsday scenario.

Read more: Is the Brent crude oil price crash anything to fear?

"In reality, such scenarios are unlikely and often ignore how physical oil trading functions," analysts at Morgan Stanley said.

"Moreover, there are few scenarios where reaching cash costs would force producers to shut in, especially over any shorter time horizon."

"Lastly, these forecasts also fail to appreciate that marginal changes in fundamentals are not driving marginal changes in oil prices."

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