Morgan Stanley's take on the Oil Market - Feb 2
Posted: Tue Feb 02, 2021 3:13 pm
This is some very bullish stuff. The Wall Street Gang is now spreading the word that global oil supply & demand are tightening quickly. Keep in mind that Non-OPEC+ production is down big and not likely to bounce back quickly. The damage done to the oilfield services companies will take quite awhile to repair.
Martijn Rats, CFA – Morgan Stanley < This is the top commodities analyst based in London
February 2, 2021 4:03 PM GMT
The oil market is showing consistent signs of tightening: inventories are drawing, time spreads are rising and the CFD curve is moving deeper into backwardation despite a healthy North Sea loading program. With covid hospitalisations falling, the case for a further demand boost is getting stronger.
> Inventories continue to trend lower. Over the last 30 days, identifiable stocks have fallen at a rate of ~1.0 mb/d. This excludes oil-in-transit, which has declined by another 2.6 mb/d over the same period, bringing total observed draws to ~3.6 mb/d – far faster than balances from key agencies suggest.
> Non-OECD demand is back to pre-coronavirus levels; OECD lagging: Combining different data sources, we can make a reasonable 'now-cast' of global refinery runs – often a proxy for oil demand. In non-OECD countries, refinery runs are already above 2019 levels again, and consistent with that, crude imports into China and India remain high by historical standards. However, in the OECD, crude runs are still ~4 mb/d below pre-coronavirus levels, and observed mobility data tells a similar story.
> Supply constrained: For now, supply declines are keeping the market tight. OPEC crude loadings have declined recently and are running ~4 mb/d lower year-on-year. Saudi Arabia's crude loadings have fallen below 6 mb/d over the last two weeks, consistent with the additional 1 mb/d voluntary cuts the country has committed to in Feb and Mar. Similarly, Russia's and Iraq's loading have fallen in recent weeks as well, and West African loadings are also unusually low.
> US production is now slowly rolling over, with Permian production on track to fall for the third consecutive month in January.
> Prices and margins paint consistent picture: All three main benchmark crude are in backwardation.
Oil Price Forecast:
Outlook - strength ahead: The front-month Brent contract is now the one for April delivery, and with shipping and refining lags taking into account, this will be converted into products hitting the market in May/June. Therefore, oil prices are starting to reflect a period where mobility restrictions can probably be moderated and oil demand could start to pick up. Yet, there is little-to-no spare capacity in non-OPEC+ countries, which puts OPEC+ in the driver's seat. We model a ~4 mb/d increase in demand by yearend, which should allow OPEC to unwind much of its spare capacity and inventories to normalise at the same time.
Our 2H21 Brent forecast is $60, but we recognise prices may overshoot. < Compares to Goldman Sachs' forecast of $65 Brent by July, 2021.
Martijn Rats, CFA – Morgan Stanley < This is the top commodities analyst based in London
February 2, 2021 4:03 PM GMT
The oil market is showing consistent signs of tightening: inventories are drawing, time spreads are rising and the CFD curve is moving deeper into backwardation despite a healthy North Sea loading program. With covid hospitalisations falling, the case for a further demand boost is getting stronger.
> Inventories continue to trend lower. Over the last 30 days, identifiable stocks have fallen at a rate of ~1.0 mb/d. This excludes oil-in-transit, which has declined by another 2.6 mb/d over the same period, bringing total observed draws to ~3.6 mb/d – far faster than balances from key agencies suggest.
> Non-OECD demand is back to pre-coronavirus levels; OECD lagging: Combining different data sources, we can make a reasonable 'now-cast' of global refinery runs – often a proxy for oil demand. In non-OECD countries, refinery runs are already above 2019 levels again, and consistent with that, crude imports into China and India remain high by historical standards. However, in the OECD, crude runs are still ~4 mb/d below pre-coronavirus levels, and observed mobility data tells a similar story.
> Supply constrained: For now, supply declines are keeping the market tight. OPEC crude loadings have declined recently and are running ~4 mb/d lower year-on-year. Saudi Arabia's crude loadings have fallen below 6 mb/d over the last two weeks, consistent with the additional 1 mb/d voluntary cuts the country has committed to in Feb and Mar. Similarly, Russia's and Iraq's loading have fallen in recent weeks as well, and West African loadings are also unusually low.
> US production is now slowly rolling over, with Permian production on track to fall for the third consecutive month in January.
> Prices and margins paint consistent picture: All three main benchmark crude are in backwardation.
Oil Price Forecast:
Outlook - strength ahead: The front-month Brent contract is now the one for April delivery, and with shipping and refining lags taking into account, this will be converted into products hitting the market in May/June. Therefore, oil prices are starting to reflect a period where mobility restrictions can probably be moderated and oil demand could start to pick up. Yet, there is little-to-no spare capacity in non-OPEC+ countries, which puts OPEC+ in the driver's seat. We model a ~4 mb/d increase in demand by yearend, which should allow OPEC to unwind much of its spare capacity and inventories to normalise at the same time.
Our 2H21 Brent forecast is $60, but we recognise prices may overshoot. < Compares to Goldman Sachs' forecast of $65 Brent by July, 2021.