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Big investment banks warn about $20 per barrel oil price scenario

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Staff writer ▼ | January 12, 2016
Bank of America Merrill Lynch and Morgan Stanley warned that oil prices could fall to reach $20 per barrel in 2016.
Oil prices
Energy   Bank of America Merrill Lynch and Morgan Stanley
Bank of America Merrill Lynch said oil prices could fall to lower levels during 2016, similar to Goldman Sachs and CitiGroup — the investment banks that had warned of similar predictions earlier in the oil market.

“The price war within OPEC has just taken a turn for the worse this past weekend. Plus, Iranian barrels are about to hit the market and China seems to be in the midst of a swift CNY depreciation move. Moreover, a warmer than normal winter in both the U.S. and Europe has shaved off about 200 thousand 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 scenario in the very short-term given the extremely high 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.

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.

Yet, the bank remaining 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.

Morgan Stanley also warned that oil prices could fall to see $20 per barrel this year, joining the $20-a-barrel-club with other investment institutions.

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 impact 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.