Mounting calls on Wall Street for $20 oil

Published Mon, Jan 11 201612:18 PM ESTUpdated Tue, Jan 12 20168:47 AM EST

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. Using Kensho, a quantitative tool that aims to replicate historic market events, CNBC Pro found the top-performing names when oil prices fell by at least 10 percent over a month — such a move occurred in 29 instances in the last decade. The findings show stocks correlated to travel do well as consumers hit the road and book air travel because of gas savings. Other groups that reap the benefits of lower gas prices are restaurants and retailers due to an increase in disposable income. Among the S & P 500 components, United Continental , TripAdvisor and Ross Stores , posted some of the strongest gains with their shares rising between 3 and 5 percent when oil prices fell, according to Kensho. Read More Santoli: Two corrections too close for comfort? Analysts agree the market historically is often slow to understand the liquidity ramifications of too much leverage. "One classic lesson of debt markets consistent with the 2007-2008 debacle and today: equity investors are usually late to the game in understanding just how much of it exists, off and on corporate balance sheets," Societe Generale's Lawrence McDonald said in an email. "You can be pretty much sure we are short all of the major leveraged oil companies," short seller Jim Chanos of Kynikos Associates said Dec. 17 on CNBC. He added: "Their cash flows are getting really under duress, but they're committing to pay cash dividends so the stocks have held up. In effect they're borrowing to pay their dividend." Read More Beat the market with Martin Sass — CNBC's John Melloy contributed to this story. Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.

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

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.