Morgan Stanley's Macro Update - Sept 12

[dan_s]

Of the larger members of the Wall Street Gang, Morgan Stanley is one of the most conservative on their oil and gas price forecasts.

Oil Macro

Strong demand and weaker OPEC supply to keep market tight in 2H23.

Global crude oil demand has been robust this year and reached record high levels of
~103 mb/d in June, supported by non-OECD countries (including China) and global jet fuel
demand growth. This translated into strong demand for positive crack spread products,
such as gasoline, diesel and jet fuel, which reached 62.5 mb/d combined in June, a ~2.2 mb/
d increase from June 2022.

On the supply side, non-OPEC non-Russia supply has grown at >2 mb/d over the last 12
months (vs. few hundred kb/d in 2021 and 1H22). However, that has been offset by sharp
declines from OPEC countries (including voluntary cuts from Saudi Arabia), estimated
producing 27.6 mb/d in July, a ~0.8 mb/d decline m/m. Additionally, high-frequency tanker
tracking data suggests OPEC seaborne crude oil exports fell ~0.6 mb/d in August with
Russian exports to continue declining.

Tighter market supports higher prices. Morgan Stanley Oil Strategist, Martijn Rats,
recently raised his 2023 oil demand forecast from 1.8 mb/d to 2.1 mb/d. He now expects
Brent oil prices to remain at $80/bbl or higher through the end of 2024.
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US Natural Gas

Flat supply and hot weather have modestly tightened inventories. Since our last update,
supply has remained relatively flat, D&C activity levels have fallen further, and
summer heat has continued to boost demand, modestly tightening inventories. Notably,
power sector gas consumption reached a record this summer and is trending ~4 bcf/d
stronger y/y on a weather normalized basis. That said, current inventories are still ~8%
higher than the 5-year average and our refreshed end-Oct storage estimate of 3.86 tcf
(down modestly from 3.93 tcf) is still ~5% above normal.

D&C Activity cuts continue to improve the 2024 outlook, though risks remain.
• In the Haynesville, rig count continues to fall, dropping additional 3 rigs since late
July. So far in 2023, Haynesville rigs have fallen from ~70 to ~40, ~10 below our
estimate of levels needed to hold production flat in the basin. However, the ‘24
strip of just under ~$3.50/mmbtu will likely re-accelerate activity into next year.
Accordingly, we continue to assume rig count to recover to 60 by 1Q24, with
completion rates following a similar trend. Drilled but uncompleted well inventory
continues to rise, another source of potential supply upside.
• In the Permian, rigs and completion activity have continued to trend lower in
recent weeks, though with 2024 WTI currently ~$80/bbl, activity levels are likely
to increase into next year.
• Overall, we continue to forecast shale growth will fall from ~4 bcf/d y/y in 2023 to
2 bcf/d y/y in 2024, with our total supply estimate (net of non-shale declines &
NGLs) rising ~1.0 bcf/d in 2024. Looking ahead, our end-Oct 2024 inventory
forecast of ~3.9 Tcf is ~5% above the five-year average, though this varies widely
depending on this upcoming winter.