Oil Price Forecast by Morgan Stanley - Sept 14

[dan_s]

Martijn Rats, CFA – Morgan Stanley < He is based in London
September 14, 2021 5:44 PM GMT

Most market participants now expect oil balances to weaken in 2022 as new volumes from OPEC, Iran and shale hit the market. However, we see compelling reasons for OPEC to slow/pause its production increase.

In the meantime, inventories are drawing, demand is improving, and the shale response is muted.
Cautious consensus for 2022: Although market sentiment seems to be picking up again in recent days, most of our investor conversations in recent weeks have been somewhat 'dour', focusing on weakening balances in 2022. Admittedly, extra supply from OPEC, Iran and shale point in that direction. However, there are offsetting factors too:
> First, inventory draws suggest the market is tighter than estimated...: Observable inventories have declined by ~440 million bbl so far this year, at a remarkably steady draw-rate of 1.74 mb/d. By now, all the excess inventories built up in 2020 have been eroded, and more. Unusually, these draws are substantially larger than the deficit estimated by the IEA....which bodes well for demand: This could suggest that the market is simply more undersupplied than estimated. As supply data tend to be more accurate, this suggests upside to demand estimates. The observation that refinery outages have largely normalised and yet product stocks are still drawing supports this notion. The steady improvement in mobility statistics is also supportive.
> Second, the US shale response is not like 2016: Despite a $20+/bbl spread between average shale break-evens and 12-month forward WTI, the current rig count recovery is trailing the 2016 recovery by over 80 rigs. The DUC count has already drawn sharply, and Rystad data shows that in the last three months, both the number of active frac spreads and new frac jobs started has actually declined mostly. US shale production will still likely grow in 2022, but this is not a recovery like 2016-18.Together with low non-OPEC capex, we suspect OPEC will balance the market once more in 2022: In the past, OPEC often had to trade off near-term oil price levels against long-term market share prospects.

Given low upstream capex elsewhere, OPEC can anticipate improving market share from 2023/24 onwards. Improving demand and a shale recovery that trails 2016-18 strengthen this notion. Therefore, we suspect that OPEC will surprise positively in its willingness to balance the market in 2022. That should support Brent prices in the mid-$70s.We reiterate our long Dec 2022 Brent futures trade idea entered on 18 June with a target of $75 and a stop/reassess level of $60.