Oil could fall toward $20, but not for the reason you think

By William Watts Published: Jan 11, 2016 10:21 a.m. ET It’s more about the dollar than a global glut of crude The world’s awash in oil, but that’s not what’s driving crude toward $20 a barrel.The oil-in-the-$20s club just got a new member. But Morgan Stanley’s case for another leg lower has less to do with a global glut of crude than it does with a strengthening U.S. dollar. In a Monday note by analysts including Adam Longson, head of energy commodity research, Morgan Stanley argues that traders have put too much of the blame for recent weakness in commodities, especially oil, on market fundamentals. Instead, they contend that the primary driver over the last several months has been a strengthening U.S. dollar. Oil futures last week tumbled to their lowest levels in more than a decade, extending a selloff that has seen West Texas Intermediate crude CLG6, +2.40% the U.S. benchmark, and Brent LCOG6, +2.28% the global benchmark, drop by around 70% from their mid-2014 highs. And with China likely to further devalue its yuan currency and the Federal Reserve in tightening mode, further dollar strength seems likely, the analysts said. While oil markets are undoubtedly oversupplied, after a certain point, deteriorating fundamentals have little to do with the price action. “Oversupply may have pushed oil prices under $60, but the difference between $35 oil and $55 oil is primarily the USD (U.S. dollar), in our view,” they wrote. That’s because there is “no intrinsic value” for crude oil in an oversupplied market, they argued: The only guide posts are that the ceiling is set by producer hedging while the floor is set by investors and consumer appetite to buy. As a result, nonfundamental factors, such as the USD, were arguably more important price drivers in 2015. In fact, when we assess the [more than] 30% decline in oil since early November, much of it is attributable to the appreciation in the trade-weighted USD (not the DXY). With the oil market likely to remain oversupplied throughout 2016, we see no reason for this trading paradigm to change. Share   So given the prospect for further dollar appreciation, scenarios with oil in the $20 to $25 a barrel range are possible “simply due to currency”, they write. They calculate that a 15% devaluation of the yuan would boost the trade-weighted dollar by 3.2%. In turn, that could send oil down by 6% to 15%, or $2 to $5 a barrel,” they said, which would leave crude in the high $20s. If other currencies move as well, the move could be even more pronounced, they said. Bank of America Merrill Lynch analysts on Monday also said oil prices could drop below $30 and offered the dollar as one reason. They lowered their 2016 forecast for the average price of the U.S. benchmark to $45 a barrel from $48, and cut their Brent call to $46 a barrel from $50. ========================================================= CDC, local health departments implementing a plan to monitor people exposed to new bird flu strain in Indiana Top News Fri Jan 15, 2016 | 2:18 PM EST Wall Street hammered; S&P 500 hits lowest since Oct 2014 A trader speaks on the phone on the main trading floor of the New York Stock Exchange shortly after the opening bell of the trading session in New York, January 15, 2016. REUTERS/Brendan McDermid A trader speaks on the phone on the main trading floor of the New York Stock Exchange shortly after the opening bell of the trading session in New York, January 15... Reuters/Brendan McDermid + Traders work on the main trading floor of the New York Stock Exchange shortly after the opening bell of the trading session in New York, January 15, 2016. REUTERS/Brendan McDermid Traders work on the main trading floor of the New York Stock Exchange shortly after the opening bell of the trading session in New York, January 15, 2016. Reuters/Brendan McDermid Traders work on the main trading floor of the New York Stock Exchange shortly after the opening bell of the trading session in New York, January 15, 2016. REUTERS/Brendan McDermid Traders work on the main trading floor of the New York Stock Exchange shortly after the opening bell of the trading session in New York, January 15, 2016. Reuters/Brendan McDermid A trader speaks on the phone on the main trading floor of the New York Stock Exchange shortly after the opening bell of the trading session in New York, January 15, 2016. REUTERS/Brendan McDermid Reuters/Brendan McDermid Reuters/Brendan McDermid › Wall Street hammered; S&P 500 hits lowest since..By Abhiram Nandakumar (Reuters) - U.S. stock indexes notched deep losses in volatile trading on Friday, with the S&P 500 hitting its lowest since October 2014 and the Dow losing more than 500 points, as oil prices dived below $30 per barrel. All 10 major S&P sectors were in the red and all 30 Dow components lower. The Russell 2000 small-cap index fell as much as 3.5 percent to its lowest since July 2013. The beaten-down energy sector's 4.43 percent slide led the declines, as oil prices fell 6.5 percent. The technology sector was down 4.31 percent, as Intel's weak report weighed heavily on chip stocks. "Investors are scared to death, and the fact that it's happening at the beginning of year has some historical significance," said Phil Orlando, chief equity market strategist at Federated Investors in New York. At 13:01 p.m. ET (1801 GMT), the Dow Jones industrial average was down 448.5 points, or 2.74 percent, at 15,930.55. The S&P 500 was down 52.35 points, or 2.72 percent, at 1,869.49. The Nasdaq Composite index was down 159.40 points, or 3.45 percent, at 4,455.60. The three main indexes were set to test their percentage declines on Aug. 24 when the market plunged after China devalued the yuan. The S&P 500 has fallen 13 percent and the Dow 13.7 percent from their highs in May, pushing them into what is generally considered as 'correction territory'. The CBOE volatility index jumped as much as 29.2 percent to 30.95, it's highest since September. "When we started off the year, we were at the crossroads of concern and optimism and clearly, we've gone down the road of concern pretty quickly," said Dan Farley, regional investment strategist at U.S. Bank Wealth Management in Minneapolis. Dow components Exxon and Chevron were down 2.5-4 percent, while Caterpillar dropped 4.4 percent. Intel tumbled 10 percent to $29.48, its steepest drop in seven years, after the chipmaker's results and forecast raised concerns about its growth. That weighed on the chip index, which fell 5.8 percent, its steepest drop since March. Citigroup was down 7.5 percent at $41.99, while Wells Fargo fell 4.6 percent to $48.29, after reporting largely in-line quarterly earnings. Wynn Resorts was the among the very few bright spots, rising 7.4 percent to $55.29 after reporting in-line of quarterly revenue. U.S. economic data on Friday was also not very encouraging, with an unexpected drop in retail sales and industrial output declining again in December, underscoring a worsening outlook for fourth-quarter economic growth. "It depends on where we close today, but things could get worse before it gets better," said Art Hogan, chief market strategist at Wunderlich Securities in New York. Declining issues outnumbered advancing ones on the NYSE by 2,850 to 240. On the Nasdaq, 2,527 issues fell and 289 rose. The S&P 500 index showed no new 52-week highs and 135 new lows, while the Nasdaq recorded four new highs and 477 lows. (Reporting by Abhiram Nandakumar and Tanya Agrawal in Bengaluru; Additional reporting by Dion Rabouin in New York; Editing by Savio D'Souza) Wall Street hammered; S&P 500 hits lowest since...X Next In Top News Photo Iran oil headed for India, Europe, with sanctions lifting Trending Stories 1 Wal-Mart pulls plug on smallest store format, shuts 269 stores 2 French drug trial disaster leaves one brain dead, five injured 3 Friendly no more: Trump, Cruz erupt in bitter fight at Republican debate 4 Winners of $1.6 billion Powerball jackpot still unknown 5 Tennessee couple claim winning ticket for U.S. Powerball jackpot: NBC RECOMMENDED STORIES SPONSORED CONTENT Follow Us On Twitter Follow Us On Facebook Follow Us On LinkedIn Follow Us On Google+ Follow Us Via RSS Subscribe to Newsletters | Download our Apps Feedback | Advertise with Us | Site Index | Terms of Use | Privacy Policy | Ad Choices News and Media Division of Thomson Reuters Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. 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