Morgan Stanley increases oil price forecast

[dan_s]

Morgan Stanley is a Wall Street "follower" that raises oil and gas price forecasts after they go up. Goldman Sachs is a "leader". GS has been the Lone Wolf predicting for months that Brent would reach $80/bbl by Q4. FWIW this is Morgan Stanley's updated price forecast for oil.

Martijn Rats, CFA – Morgan Stanley
September 27, 2021 11:13 PM GMT

Not all oil market indicators are strong currently, but the majority are. Fundamentals continue to improve and the supply deficit is substantial. We reiterate our long Dec 2022 Brent futures idea, entered 18 June.

From supply to demand destruction: In our Oil Manual note from June, we argued that "Oil prices have disconnected from the marginal cost of supply. Instead, they are travelling to the level where demand destruction kicks in, which we estimate at ~$80/bbl." This remains our thesis, although the price at which demand destruction kicks in can be fiendishly difficult to estimate. We leave our price forecast unchanged for now but recognise that, on current trends, upside to our bull case scenario to $85/bbl clearly exists.

Below and inside, we highlight six observations that shine a light on the current state of the oil market:
1. OECD Inventories continue to draw at high rates: On average since the start of the year, we can identify ~1.9 mb/d of inventory draws, which has accelerated to ~3.0 mb/d over the last 31 days. These draws are high and suggest the market is more undersupplied than generally perceived.
2. Mobility statistics are improving: Apple Mobility data is up meaningfully year-on-year and is showing resilience against the usual seasonal decline recently. Baidu data for China shows recovery after the summer slowdown. Flightradar data on commercial flights is closing the gap to pre-covid levels, and TomTom data suggests congestion is high and/or rising in most places.
3. Jet fuel crack spreads are improving, supporting refining margins: Jet fuel has been the weak part of oil demand over the last 18 months, but crack spreads are improving and closing in on their 5-year average again.
4. West Africa differentials picking up; ESPO widened vs Dubai: West African diffs do not signal unusual tightness in the physical market but are on a notable uptrend again recently. Similarly, ESPO crude – often bought by Chinese refineries – has strengthened compared to Dubai crude, in itself an encouraging sign for China's buying interest.
5. Global crude loadings continues to be (very) low; Iranian exports down since April: The rise in prices this year has not triggered an increase in shipments so far – seaborne loadings are still broadly at 2020 levels.
6. However, expressed in a basket of EM currencies, diesel prices are now at the top-end of the historical range: Diesel prices expressed in Brazilian real, Mexican peso, Turkish lira, South African rand or Indonesian rupiah are already close to or above 2012/13 levels, when Brent was ~$110/bbl, likely driving some demand erosion.