Morgan Stanley Expects $40 Brent By Christmas

Morgan Stanley expects Brent crude to trade at $40 a barrel by the end of the year thanks to the recovery in demand, which has taken off faster than the bank expected, it said as quoted by Reuters.

“We expect demand to rebound to about 97 million barrels per day (bpd) by Q4 as economies come out of lockdown - a significant improvement although still down about 4 million bpd year-on-year,”

But Morgan Stanley analysts are going further: thanks to production cuts in OPEC and outside it, the oil market could swing into an undersupply in the last quarter of the year, to persist during the first quarter of 2021 as well. The size of the supply shortage would be about 4 to 6 million bpd.

“Now that the rebalancing has been set in motion, we expect it to continue. Our base case forecasts call for a further tightening of the oil market over the next few quarters,” the bank said.

Optimism is indeed returning to oil, although it remains guarded. Russia’s Energy Minister Alexander Novak recently said he expected supply and demand to rebalance by July, with the supply overhang at 7 to 12 million bpd.

And yet nothing is certain.

“Whether the feared second round of covid-19 will emerge is a crucial question, but even if it does you could surmise that there won’t be such a sharp crash by oil again anytime soon,” said Exness market analyst Michael Stark in comments on the market situation. “With so much production having been cut and the public’s patience running really thin with lockdowns in many countries, the same kind of double shock to both supply and demand isn’t very likely.”

Demand for oil has begun recovering thanks to the easing of lockdowns across most of the world but there are doubts it will rebound to pre-crisis levels as people’s habits change, including in the transport aspect. Yet supply cuts appear to have done their job in stimulating prices. These, according to Russia’s Novak, have reached 15 million bpd. In the U.S. alone, producers have cut up to 1.4 million bpd, pressured by the circumstances.

OPEC+ is meeting next month to discuss whether to increase the current cuts—9.7 million bpd—or ease this to 7.7 million bpd as initially agreed.

By Irina Slav for Oilprice.com

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