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How the PBOC could send oil below $25

A Chinese vessel involved in the oil exploration industry.
Rob Ellis | E+ | Getty Images
A Chinese vessel involved in the oil exploration industry.

The dramatic slide in the price of oil could continue to new lows, according to one financial expert, who predicted erratic policy from Chinese officials could send the commodity below $25 a barrel.

A glut in supply and weak demand have been the main factors behind oil's plunge since mid-2014, amid the rise of U.S. shale producers and the refusal by OPEC to shut off the spigots. From close to $110 a barrel in July 2014, WTI futures have plunged to trade at $32.53 a barrel Monday morning to almost 12-year lows.


However, analysts at Morgan Stanley are adamant that the recent price moves are more on the back of the rise in the U.S. dollar, in which the commodity is traditionally priced.

"It's not about deteriorating fundamentals: The USD and non-fundamental factors continue to drive oil prices," a research team at Morgan Stanley, led by Adam Longson, said in a note Monday.

Further to this, it calculates that the Chinese yuan is 21.5 percent of the trade-weighted U.S. dollar index, which is a measure of the value of the greenback relative to other world currencies. With speculation that the Chinese currency is set for further falls, Morgan Stanley predicts that it could boost the price of the dollar and thus pressure oil prices further.

"If rapid devaluation occurs, a 15 percent (yuan) depreciation alone could send oil into the $20s. Some analysts' most drastic price scenarios could be realized," the bank said. "$20-25 oil price scenarios are possible simply due to currency."

Speculation last week that the People's Bank of China was looking to sharply devalue its currency added to the weak sentiment that saw equity markets plunge around the world.

News agency Reuters reported Thursday, citing sources, that policymakers were being pressured to oversee a 10-15 percent debasement. Morgan Stanley highlight the weakness that this could cause in commodity markets but note that this is not its central scenario for the yuan.

Oil analysts have continued to pick a potential bottom for the oil price in 2016 which has edged lower amid the turmoil in equity markets. Goldman Sachs had a gloomy estimate for $20 oil in September, but said at the time that this wasn't its base case. RBS recently detailed its own scenario for Brent crude, suggesting it could hit a bottom of $26 a barrel and stay low for the next two years.

However, there is still some optimism lingering in international markets. Patrick Armstrong, CIO of Plurimi Investment Managers, told CNBC Monday that his team has changed its outlook on oil, now expecting it to push higher, after having a "short" on the commodity for the last nine months of 2015.