Morgan Stanley's view on oil prices

[dan_s]

The Commodity Manual: Crude Demand Is Soft, But IEA May Be Too Bearish; Positioning Mixed; Bullish Gas Data
Adam Longson, CFA, CPA – Morgan Stanley
October 17, 2016 12:57 AM GMT
Energy

Crude Demand Underperforming, But IEA May Be Too Bearish 4Q16 (p.2). The IEA continues to revise down crude demand while holding product demand steady. IEA trimmed its 2H16 crude demand by ~200 kb/d vs. last month. IEA now forecasts flattish global crude throughput YoY for 2016 vs. YTD global gasoline demand growth of ~500 kb/d. However, even though IEA forecasts a 3.4 mmb/d increase from Oct to Dec 2016 – the most since 2013 - the IEA may be too bearish on crude oil demand from refiners in 4Q16 for several reasons: 1) The refinery maintenance schedule is fairly light in 4Q16 as of now. 2) Refinery margins are not poor. 3) Achieving the IEA’s estimate for YoY crude runs in 4Q16 would likely require greater deceleration in gasoline demand growth and/or a weak distillate market. 4) Runs were strong in 4Q15, but distillate demand was weak on a mild winter.

The Good and Bad of Oil Positioning: As we wait for OPEC, positioning and technical factors may become greater price drivers, and we find a mixed outlook.

The Good News: Short positioning has been a driver of prices this year, and new shorts are unlikely before Nov 30. The USD has rallied and expectations for a Dec rate hike are high. Momentum has stalled, but we have seen an appetite to buy dips post-OPEC.

The Bad News: Net long positioning has tended to hit highs several weeks before crude prices peak over the past two years, and we are currently close to the all-time high. With stretched positioning in the front of the curve, it may be increasingly difficult to find the marginal buyer. The market is increasingly bullish the USD, and the USD remains below its YTD highs. US crude stocks are setup to build seasonally, as long as imports hold up. According to our shipping analyst, Middle East charters are rising, including to the US. The broader macro and risk environment has been less supportive of late. Ample producer selling has pressured the back of the curve despite spec buying.

Bullish Nat Gas Data/News Continues: Natural gas prices rallied to new YTD highs last week as storage injections continue to fall below-expectations and suggests the surplus may disappear before month-end. Meanwhile, more news regarding northeast pipeline delays supports our long-held skeptical view for production growth in 2017.

I agree that the price of oil is likely to flop around $50 through November. - Dan