Mounting calls on Wall Street for $20 oil

Contract workers fit drill pipe sections on the drilling floor of an oil rig in the Salym oilfields, operated by Salym Petroleum Development NV, near Surgut, Russia.
Alexander Zemlianichenko Jr. | Bloomberg | Getty Images
Contract workers fit drill pipe sections on the drilling floor of an oil rig in the Salym oilfields, operated by Salym Petroleum Development NV, near Surgut, Russia.

Oil's free fall may continue says yet another major Wall Street bank. So how should investors trade it?

Even after the world's most important commodity fell to the lowest price since 2004 on Monday, Morgan Stanley warned of another oil plunge due to Chinese currency devaluation risk.

"The truth is that there is a strong inverse correlation between the trade-weighted U.S. dollar (which is rising sharply) and commodity prices, which has a fundamental basis," Morgan Stanley's Adam Longson wrote in a note to clients Monday.

He added: "Some analysts' most drastic price scenarios could be realized, but not for the reasons suggested. Oil is particularly levered to the U.S. dollar. ... Given the continued U.S. dollar appreciation, $20 to $25 oil price scenarios are possible simply due to currency."

Morgan Stanley follows Goldman Sachs' $20 oil downside risk call last month on OPEC maintaining production and storage capacity reaching constraints.

"We reiterate our concern that 'financial stress' may prove too little too late to prevent the market from having to clear through 'operational stress' with prices near cash costs to force production cuts, likely around $20/barrel," Goldman Sachs' Damien Courvalin wrote in a note to clients Dec. 17.

If Morgan Stanley and Goldman Sachs are correct, here's two ways to profit from the call.

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