North Carolina, (IINA) - Two international investment banks - Bank of America Merrill Lynch and Morgan Stanley - warned on Monday that oil prices could fall to reach $20 per barrel in 2016, Anadolu Agency reported.
Bank of America Merrill Lynch, a global corporate and investment bank, said oil prices could fall to lower levels during 2016, an opinion similar to those of Goldman Sachs Group and CitiGroup Investment.
"The price war within OPEC has just taken a turn for the worse this past weekend. Moreover, Iranian barrels are about to hit the market, and China seems to be in the midst of a swift CNY (China's currency Yuan) depreciation move. Moreover, a warmer than normal winter in both the U.S. and Europe has shaved off about 200,000 barrels per day of demand in each region", the bank explained.
"A combination of factors could still drive crude oil prices into a mid-$20s (per barrel) scenario in the very short-term given the extremely high [oil] inventories", it warned.
The investment bank has also revised down its forecast of the international benchmark Brent crude oil price from the average of $50 a barrel to $46 per barrel for 2016. In addition, it revised down the price of American benchmark West Texas Intermediate (WTI) from $48 a barrel to $45 per barrel for 2016.
However, the Bank of America Merrill Lynch cautioned that declining oil production in the U.S. still could drive prices higher.
"Many energy companies are finally starting to get into financial trouble, and at least 20 U.S. oil and gas companies filed for bankruptcy in the second half of 2015, largely exceeding the levels reached in 2008/09... A decline into the $20s [per barrel] would mean that many companies would not be able to cover operating cash costs, marking a possible inflection point for oil. Moreover, U.S. shale output is coming down swiftly", it explained.
The investment bank remained hopeful when stating that the combination of the mentioned factors would lead to a bottoming out of oil prices eventually in the first half of this year, and noted that it expects prices to recover in the summer months of 2016. The U.S-based multinational investment banking firm Morgan Stanley also warned that oil prices could fall to see $20 per barrel this year.
The bank highlighted the slowdown of the economy of China, the world's second-biggest oil consuming country, which has brought down global oil demand and pushed prices lower.
In addition, the possibility of depreciation in Chinese currency could also negatively influence the country's crude oil purchasing power, Morgan Stanley warned. "If rapid devaluation occurs, a 15 percent in Chinese Yuan depreciation alone could send oil into the $20s (a barrel)", the bank said.
In August, China had depreciated its currency Yuan against the U.S. dollar three times, and did so once last Thursday, in order to increase the purchasing power of other countries that import Chinese goods.
However, depreciation of the Yuan also weakens the power of the country to purchase oil, and brings global crude demand and oil prices lower, since oil prices are indexed to the U.S dollar.
In addition, Morgan Stanley warned that the rising value of the U.S dollar against other major currencies could lower the demand of oil importing countries and bring oil prices down even further.
"Given the continued U.S dollar appreciation, $20 to $25 oil price scenarios are possible simply due to currency", the bank stated. "If the U.S dollar appreciated five percent, oil could fall 10-25 percent".
The price of Brent crude fell as low as $31.66 a barrel and WTI dived below $31 per barrel mark on Monday before 6:30 p.m. GMT, reaching their lowest value in more than a decade, and marking a higher than 70 percent decline since mid-2014, according to official figures.
AG/IINA
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