Oil price to plunge further on higher dollar value

An increase in value of the United States of America currency, the dollar, could further cause the price of crude oil in the international markets to slide to $20, analysts at Morgan Stanley, an American multinational financial services, have said in a report posted on CNN.

The implication of this is that the Nigerian government would have to go back to the drawing board in respect of her 2016 budget benchmark pegged at $38 per barrel.

The company in a report published Monday, the analysts say a 5 percent increase in the value of the dollar against a basket of currencies could push oil down by between 10 percent and 25 percent, which would mean prices falling by as much as $8 per barrel.

Crude futures are already trading at around $30, near their lowest levels in 12 years. Prices slumped 1.8 percent on Monday, and are 13 percent down so far this year.

Oil has dropped more than 65 percent since a peak 18 months ago. Analysts have attributed the slump to a global supply glut brought about by slowing demand and high production.

But the report by Morgan Stanley says the dollar’s gains are also to blame. Global oversupply may have pushed oil below $60 per dollar, but the recent falls are due to sharp currency moves.

But Nosa Omorodion, president, Nigerian Association of Petroleum Explorationists (NAPE), said that he was not convinced that some of the forecast would come to past as the reality on ground was always different from analysts forecast, saying the demand for the product was still high.

“Most of what the analyst say are based on speculations, and many occasion do not come true,” he said.

The country bases her budget on a benchmark of $38 per a barrel of oil, and the price has since fell to $30 Monday. However, it is being speculated that the National Assembly may decide to bring the benchmark further down in order for it to be in tandem with the realities of the price of crude oil.

Another industry operator asked to comment on the issue simply said “we hope the situation would not continue like this for too long for the economy. These are trying times for the industry.”

The International Energy Agency says the oil market is likely to remain over supplied throughout 2016. And if the dollar keeps strengthening, it could squeeze prices even further, according to Morgan Stanley.

“Given the continued US (dollar) appreciation, $20-25 oil price scenarios are possible simply due to currency,” the analysts wrote.

As the dollar strengthens, it makes oil more expensive for buyers paying with other currencies. That can weigh on demand and prices.

Of particular concern is the relationship between China’s currency and the dollar. The yuan has already fallen about 6 percent since last August.

Any move by the People’s Bank of China to devalue the yuan still further could add to the pressure on oil prices because China is the world’s biggest importer.

The central bank has been guiding the currency lower against the dollar in order to aid Chinese exporters and prop up weakening economic growth.