Oil Market Update from Morgan Stanley - Jan 7

[dan_s]

Oil Strategy | Martijn Rats Head of Energy Sector Research at Morgan Stanley
1-7-2021

MS Global Oil Strategist Martijn Rats highlights that oil demand is still running ~6 mb/d below year-ago levels,
but judging by observable inventories, the market is broadly in equilibrium. By 4Q, he estimates total product
demand to recover ~4 mb/d from current levels. Martijn also notes that there is no meaningful spare capacity
outside OPEC+ and even short-cycle shale is not in a position to turn around quickly. Non-OPEC supply in 2022
and beyond is still an open question, but in 2021, Martijn thinks OPEC will need to meet this demand growth. He
believes this puts OPEC in a position in which it can raise supply several million barrels per day but still keep the
market undersupplied. On his current OPEC production outlook, Martijn foresees the market to be ~1.3 mb/d
under-supplied during 2021, sufficient to bring OECD inventories back to normal by year-end. As 2021
progresses, Martijn believes oil fundamentals are likely to improve steadily but this is happening against a
backdrop rising inflation expectations - a key call from the MS economics team - as well as a continuing
weakening US dollar. Both factors are typically a boon for commodities, including oil.
Additionally, Martijn points out that Brent is trading above its 25-day moving average, time spreads are
positive, time spreads themselves are showing positive momentum, and positioning is improving from low levels.

Like it or not, the U.S. and Europe are now dependent on OPEC+ for oil supply.