Average global crude oil prices are likely to reach a level of around $75 per barrel by the end of the third quarter this year from around $60 per barrel currently on the back of a host of factors, according to Morgan Stanley.
The investment banking and financial services firm said based on its estimates, the oil market is likely to be undersupplied by 0.5 million barrel per day (mbpd) in second quarter, increasing to 0.8 mbpd by third quarter. This is expected to drive the Organisation for Economic Co-operation and Development OECD inventories 6-7 per cent below the 3-year moving average.
“If history is any guide, this supports a more deeply backwardated forward curve. We expect the 1-12 month Brent time spread to rally to $4.5 from $1.8 per barrel at the moment. Under these conditions, we see the front month Brent contract rising to $75 per barrel by end 3Q,” Morgan Stanley said in its latest oil report.
After an oversupplied fourth quarter, the oil market has largely come into balance in the first quarter of 2019.
Inventories built in January but well below historical norms and higher-frequency data point to global draws since then. Also, the recent rally has been accompanied by deeper backwardation and refining margins that have been maintained within normal ranges – all positive signs.
“Comments from OPEC officials suggested stronger determination to support oil prices than we had previously thought. Also, production in Venezuela appears more fragile, with recent power outages impacting production. Finally, risks to Iran’s production are still skewed to the downside following comments from state department officials at CERA Week,” the report said.
The global demand had slowed towards the end of 2018 but still left year-on-year growth at 0.95 mbpd in fourth quarter. The IEA has pegged the global demand growth at 1.5 mbpd in January. Morgan Stanley said its economists are also constructive on global economic growth as a combination of China’s stimulus, a more dovish Fed and a resolution of trade conflict are likely to drive global GDP growth back to its trend rate by the end of the year.