Oil could fall toward $20, but not for the reason you think
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, +2.20% 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.