Oil prices will struggle to rise above $50 a barrel because of the technological shift in U.S. shale that has unlocked more production in recent years, and because of the growing importance of environmental considerations in investing, Morgan Stanley says.
According to the investment bank's most recent market insight on crude oil, the market moved from a 'peak oil supply' narrative back in 2008 to concerns about peak demand in 2020.
"How we got here is a story of technology and environmental advocacy, and one that has material cross-asset implications," Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley, said.
Technology, especially fracking, allowed U.S. producers to dramatically raise oil production in recent years, while investments in green energy and technology are already becoming a major investment theme, according to Morgan Stanley.
Expectations that oil demand may be closer than thought before the pandemic and the environmental policies have significant implications on the oil market, the investment bank said.
"Coupled with the near-term challenges our analysts see for the oil market, we think prices will really struggle to move above $50/barrel, as levels above this will encourage producers to hedge much more aggressively at these prices. As such, oil prices should lag other 'reflationary' assets in this cycle that we like a lot more," Morgan Stanley's Sheets said.
The Wall Street bank is more bullish on natural gas producers than it is on oil producers because of more favorable fundamentals in the gas markets.
If Joe Biden wins the U.S. election next month, Environmental, Social, and Corporate Governance (ESG) investing could become the biggest trend in developed economies.
"Depending on the U.S. election result, environmentally focused investment might end up being the single biggest theme in fiscal stimulus across the U.S. and Europe, over the next decade," Sheets said.
A Joe Biden win will likely be an upward catalyst for oil prices because it will increase costs for the shale patch and will likely result in a weaker U.S. dollar, Goldman Sachs said in a note this weekend.
By Tsvetana Paraskova for Oilprice.com
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