Oil’s dismal start to the New Year continued on Monday as prices plumbed fresh lows, with Morgan Stanley adding to a growing number of voices warning that prices could slide to $20 a barrel.
Brent, the global oil marker, fell by more than $2, or 6 per cent, to $31.48 a barrel in late trading, a level last reached in April 2004. On the other side of the Atlantic, meanwhile, West Texas Intermediate, the US oil benchmark, dropped $1.70 to $31.28 a barrel, a fresh 12-year low.
The falls extended to 16 per cent a rout that had seen more than 10 per cent knocked off both benchmarks in the first trading week of 2016.
“Oil in the $20s is possible,” said Morgan Stanley analyst Adam Longson in a report that focused on risks posed to commodities by the possibility of China further devaluing its currency.
A slowdown in China, whose growth led the rise in global oil demand over the past decade, in recent weeks has added fears of slowing consumption to massive oversupply, even after a 70 per cent price drop over the past 18 months.
While efforts to further weaken China’s currency could help shore up its export-focused economy, it would make imports of oil and other dollar-priced commodities more expensive and would be likely to further hit demand.
“[That] could lead to another round of commodity weakness and send oil into the $20s,” said Mr Longson in the report. “$20-$25 oil price scenarios are possible simply due to currency.’’
Banks such as Goldman Sachs, Citigroup and Bank of America Merrill Lynch (BofA) have also predicted that the oil overhang could push crude prices down to $20 levels but for different reasons. Some are concerned that storage tanks in the US could fill up and that prices will to have fall to levels that make it economic to hold oil on tankers at sea.
The proliferation of pessimistic views comes as excess supplies of oil show little sign of abating.
Prices averaged almost $100 a barrel between 2008 and 2014, fuelling a supply boom that the OPEC producers’ group has countered by not cutting output of its own, sparking a war of attrition. While a boon for motorists, the price rout has shredded the budgets of oil producing countries and forced oil major to slash thousands of jobs and cut hundreds of billions of investment plans.
Hedge fund bets against the oil price are close to record levels, standing at the equivalent of almost 363m barrels in futures and options contracts on exchanges in New York and London.
But funds last week did raise long positions in the international benchmark Brent, even as they reduced them in WTI, suggesting some have been wrongfooted by the latest price fall.
BofA on Monday lowered its forecasts for crude oil prices for this year, pointing to excess supplies from OPEC, China currency woes and already high inventories.
The investment bank cut its Brent price forecast from $50 a barrel to $46, and lowered its estimate for West Texas Intermediate from $48 a barrel to $45.
“We believe it is early to pick a bottom,” said BofA analysts.
Société Générale also cut its estimates, citing the re-emergence of Iranian production and still resilient US output.
“Strong fears of a hard landing in China and other emerging markets have [also] been taken into account,” added Michael Wittner, analyst at the French bank.
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