Morgan Stanley Says All Oil Signals Flashing Tightness

The price for Brent has risen, Morgan Stanley said in a note on Thursday, and all signals for crude oil are “flashing tightness,” with prices being supported at current levels.

“Not only has Brent flat price risen, but calendar spreads have rallied, refining margins are unusually strong, the CFD curve is deeply in backwardation and physical differentials are elevated,” Morgan Stanley said, adding that fundamental data is telling “a similar story,” with robust demand growth and falling inventories.

According to MS, the oil market is currently undersupplied by about 1 million barrels per day, with inventory suggesting an undersupply of 1.3 million bpd so far this quarter. The undersupply—coincidentally or not so coincidentally—pretty closely matches the volume of OPEC production declines this quarter compared to the 2^nd quarter.

As Morgan Stanley points out, this curb in supply was almost entirely carried out by OPEC heavyweight Saudi Arabia.

As such, OPEC, and in particular Saudi Arabia, “are key” to the oil market outlook.

Morgan Stanly’s new Brent price forecast for Q4 this year is $95 per barrel—up from $82.50. Its outlook for Q1 2024 is for $92.50 per barrel, up from an estimate of $80 in its previous outlook. That outlook is based on the assumption that Saudi Arabia will continue its voluntary production cuts into March 2024, with the undersupply continuing until early next year, with a small surplus in total beginning to emerge in Q2 2024—but crude oil surplus carrying on unabated until the end of next year.

But much of that is already baked into current oil prices, and Morgan Stanley sees Brent between $85 and $95 per barrel through the end of next eyar.

“As long as the market remains in deficit, prices are well supported around curent levels.”

By Julianne Geiger for Oilprice.com

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