Morgan Stanley's Oil Price Forecast - Feb 7
Posted: Mon Feb 07, 2022 6:21 pm
Martijn Rats, CFA – Morgan Stanley With my comments in blue.
February 7, 2022 7:58 PM GMT
Petroleum inventories continue to draw, OPEC production appears to have lagged the quota once again in Jan, and product markets signal strength. We raise our production forecast for Iran following recent news flow but that doesn't change our balances fundamentally. We reiterate our $100 Brent call.
Still heading for a 'triple deficit': We laid out our thesis for the oil market in 2022 in our January 6 note "The Oil Manual: Heading for a Triple Deficit." In that note, we argued oil markets could see simultaneously low inventories, low spare capacity and still low levels of investment during 2022. Against that backdrop, we make three observations:
#1 Inventories continue to draw: 1 shows our most aggregate overview of global oil inventories, combining data on both crude oil and oil products stored on land, at sea or in-transit, based on data from nine different source. This exhibit focussing on the period since the start of 2021, but longer time-series and more detailed breakdowns are shown in 24 to 27. During most of 2021, inventories drew at a relentless pace, at around 1.9 million barrels per day. These stock draws have slowed, but only modestly. The trendline highlighted in red captures the period since mid-Nov. Since then, inventories have been falling at a rate of ~1.2 mb/d, slower than in the months before but strong draws nonetheless.
For the first few months of 2022, our balances suggest builds - albeit far smaller ones than those modelled by the IEA, EIA or the OPEC secretariat. Yet, these builds don't appear to be coming through. < Demand for oil is seasonal. Q1 is the lowest demand period of the year and Q2 normally (2020 an exception) has the largest quarter-over-quarter increase in demand for oil.
#2 OPEC+ production likely to have lagged the quota increase again in January
14 out of the 19 countries that make up the OPEC+ group already produced less than their quota allowance in December. According to data from S&P Global Platts, the group lagged its target by 832kb/d in aggregate during that month.
Production data for January is not yet available but tanker tracking data suggest not much improvement. Tanker tracking only gives an estimate of seaborne exports, not production, but for the core OPEC group these two correlate closely. As shown in Exhibit 3, seaborne exports actually declined in January by ~290 kb/d, whilst the quota for the core OPEC group increased by 250 kb/d.
There are several reasons for this: Iraq struggled with technical issues, which means Basra loadings declined sharply. Libya also saw a range of issues that led to the shut-in of four key fields in late December and disruptions to flows through the Es Sider export terminal. Elsewhere there were declines in exports from Iran, Venezuela, Angola and Algeria.
The decline in exports does not necessarily mean that production also declined, but it does suggest that production lagged the quota increase again in January. In our 'Triple Deficit' note, we argued that by the middle of the year 2022, OPEC+ spare capacity will have
fallen to a very low level; at least so far, the recent production levels from OPEC+ point in the same direction.
#3 Products markets continue to signal strength
Although crude oil prices have risen sharply, even stronger signs of tightness are visible in oil products markets. The charts below show crack spreads, time spreads and inventories for gasoil/diesel and gasoline. The strength in cracks spreads can partially be explained by the high cost of natural gas, power and carbon credits which means realised refining profitability is not as high as crack spreads suggest.
Nevertheless, the collective message of these charts is clear - product markets are tight: product cracks are well above the 5-year seasonal high, forward curves are unusually backward-dated, and inventories are low and falling.
The declining trend in product inventories will need to be arrested at some point. If the demand recovery continues on top of that - and we strongly expect it will - than refineries will need to run harder. That will require higher crude oil throughput, which will subsequently tighten crude markets further.
Conclusion: Our balances point towards inventory draws in 2022; we reiterate $100 Brent by 3Q
February 7, 2022 7:58 PM GMT
Petroleum inventories continue to draw, OPEC production appears to have lagged the quota once again in Jan, and product markets signal strength. We raise our production forecast for Iran following recent news flow but that doesn't change our balances fundamentally. We reiterate our $100 Brent call.
Still heading for a 'triple deficit': We laid out our thesis for the oil market in 2022 in our January 6 note "The Oil Manual: Heading for a Triple Deficit." In that note, we argued oil markets could see simultaneously low inventories, low spare capacity and still low levels of investment during 2022. Against that backdrop, we make three observations:
#1 Inventories continue to draw: 1 shows our most aggregate overview of global oil inventories, combining data on both crude oil and oil products stored on land, at sea or in-transit, based on data from nine different source. This exhibit focussing on the period since the start of 2021, but longer time-series and more detailed breakdowns are shown in 24 to 27. During most of 2021, inventories drew at a relentless pace, at around 1.9 million barrels per day. These stock draws have slowed, but only modestly. The trendline highlighted in red captures the period since mid-Nov. Since then, inventories have been falling at a rate of ~1.2 mb/d, slower than in the months before but strong draws nonetheless.
For the first few months of 2022, our balances suggest builds - albeit far smaller ones than those modelled by the IEA, EIA or the OPEC secretariat. Yet, these builds don't appear to be coming through. < Demand for oil is seasonal. Q1 is the lowest demand period of the year and Q2 normally (2020 an exception) has the largest quarter-over-quarter increase in demand for oil.
#2 OPEC+ production likely to have lagged the quota increase again in January
14 out of the 19 countries that make up the OPEC+ group already produced less than their quota allowance in December. According to data from S&P Global Platts, the group lagged its target by 832kb/d in aggregate during that month.
Production data for January is not yet available but tanker tracking data suggest not much improvement. Tanker tracking only gives an estimate of seaborne exports, not production, but for the core OPEC group these two correlate closely. As shown in Exhibit 3, seaborne exports actually declined in January by ~290 kb/d, whilst the quota for the core OPEC group increased by 250 kb/d.
There are several reasons for this: Iraq struggled with technical issues, which means Basra loadings declined sharply. Libya also saw a range of issues that led to the shut-in of four key fields in late December and disruptions to flows through the Es Sider export terminal. Elsewhere there were declines in exports from Iran, Venezuela, Angola and Algeria.
The decline in exports does not necessarily mean that production also declined, but it does suggest that production lagged the quota increase again in January. In our 'Triple Deficit' note, we argued that by the middle of the year 2022, OPEC+ spare capacity will have
fallen to a very low level; at least so far, the recent production levels from OPEC+ point in the same direction.
#3 Products markets continue to signal strength
Although crude oil prices have risen sharply, even stronger signs of tightness are visible in oil products markets. The charts below show crack spreads, time spreads and inventories for gasoil/diesel and gasoline. The strength in cracks spreads can partially be explained by the high cost of natural gas, power and carbon credits which means realised refining profitability is not as high as crack spreads suggest.
Nevertheless, the collective message of these charts is clear - product markets are tight: product cracks are well above the 5-year seasonal high, forward curves are unusually backward-dated, and inventories are low and falling.
The declining trend in product inventories will need to be arrested at some point. If the demand recovery continues on top of that - and we strongly expect it will - than refineries will need to run harder. That will require higher crude oil throughput, which will subsequently tighten crude markets further.
Conclusion: Our balances point towards inventory draws in 2022; we reiterate $100 Brent by 3Q