Oil price forecast to fall to $20 a barrel, predicts Morgan Stanley (The Guardian- Monday 11 January 2016)

Larry Elliott 

Monday 11 January 2016

 

Leading Wall Street bank says price will keep falling 

if China’s currency continues its plunge against US dollar 

 

The price of crude oil could tumble to $20 a barrel in the coming months if China’s currency continues to decline against the US dollar, one of Wall Street’s leading investment banks has predicted.On a day when the cost of crude hit a new 12-year low and edge closer to the $30 a barrel level, Morgan Stanley posted a forecast on Monday of $20-25 a barrel for oil based on movements in currencies.

Oil is priced in US dollars and Morgan Stanley’s analyst, Adam Longson, said it had been the strength of the greenback rather than oversupply that had pushed crude down by $20 a barrel in the past two months.

China’s currency, the yuan, has been weakening as a result of concerns about the health of the economy, and Longson said: “Given the continued US dollar appreciation, $20-25 oil price scenarios are possible simply due to the currency.”

The cost of Brent crude dropped by almost 5% in London business trading, and ended the day just under $32 a barrel - its lowest level since late 2003.

Reports from Beijing have suggested that the Peoples’ Bank of China is considering a 15% cut in the value of the yuan in an attempt to reduce the cost of exports and thus boost growth.

The yuan makes up just over a fifth of the basket of currencies used to calculate the dollar’s trade-weighted international value, so a 15% yuan depreciation would send the dollar up by 3.2%. Longson said this would be enough to push oil below $30 a barrel.

“If other currencies move as well, the move in the USD and oil could be even greater. Hence, we remain bearish, even after the notable downward move already.”

The stock market in China opened the week with fresh falls in share prices, which dropped 5% to their lowest level since last September. Amid growing speculation that growth in the world’s second biggest economy is weaker than official figures suggest, luxury car maker Rolls-Royce said sales in China had declined by 54% in 2015.

Meanwhile copper, a key industrial metal, is now cheaper than it has been for seven years - seen by analysts as a sign that demand from manufacturers is weak.

XTM Research Analyst Lukman Otunug said: “Fears have heightened over China’s ailing economy and with confusion towards the unexpected devaluations leaving market participants questioning Beijing’s overall policy intentions; global sentiment may remain heavily depressed.”

In London, the FTSE 100 fell a further 41 points to 5872, the lowest closing level for the index of UK quoted blue-chip companies since late 2012. The FTSE includes a large number of mining and commodity stocks that have been vulnerable to the sharp fall in the cost of oil and industrial metals in recent months.

The oil price remained under downward pressure in New York, where there were early attempts at a rally in share prices following last week’s falls. By lunchtime, the Dow Jones Industrial Average was up around 50 at just under 16400.