China, aviation demand surge to lift Brent to $100-$110/b in 2H 2023 – M.Stanley
Quantum Commodity Intelligence - Morgan Stanley expects oil markets to stage a strong recovery this year with Brent set to reach the $100-$110/b range by the second half of the year, buoyed by a resurgent China.
The investment bank, however, sees prices stable for now as economic headwinds keep a lid on any immediate oil price rebound.
"We expect Brent prices to remain range-bound for the remainder of 1Q around the current level of $80-85/b. However, inventories are low and spare capacity is thin," said the bank in its latest research paper titled Heavy Now, Higher Later.
"When demand growth returns, the oil market will likely find that the supply ceiling is still not far away. Our expectation is that this will support Brent in the $100-110/b range by 2H 2023."
The report said that the macroeconomic backdrop still weighs heavily on oil markets, noting recessionary pressures, but markets are likely to tighten as the year unfolds.
"Even with modest demand growth assumptions, we see the oil market coming into balance in 2Q and turning tight in 3Q and 4Q, supporting higher prices later this year."
The bank said key support for higher oil prices will come from the reopening of China and continued recovery in the global aviation section.
"In recent weeks, China's reopening has accelerated sharply, developing faster than we initially expected. This is reflected in mobility indicators, which were still trending downwards back in November, but have since bottomed out and are improving again," said the report, adding China could boost oil demand by close to 1 million bpd this year.
On jet fuel, Morgan Stanley noted that consumption peaked at 8 million bpd in late 2019 and despite a partial recovery in 2021 and 2022, demand was running at 6.2 million bpd by November last year.
But the bank now sees demand up to 7.25 million bpd in Q2, adding over 1 million bpd in just two quarters.
Supply
On the supply side, the bank forecasts a disruption to Russian oil supply "approaching 1 million bpd from current levels" as a result of sanctions and price caps.
For the longer term, Morgan Stanley said underinvestment "remains a concern," noting exploration capex showed another real-term decline as exploration wells drilled reached a 10+ year low in 2022 and discoveries were once again close to historical lows.
"Spending on field development rebounded, but much of this was to absorb cost inflation, which accelerated strongly. New projects sanctioned contained 12.7 billion barrels of oil resources, the second-lowest level in 20 years," said the report.
The bank also highlighted a slowdown in US shale potential, noting growth over the last two years has been entirely from the Permian Basin, while output from all other shale basins had flatlined and remains below pre-Covid levels.
"However, even growth in the Permian has recently become more concentrated. Within the Delaware, there continues to be strong growth on the New Mexico side, but growth on the Texas side has already stalled. The Midland is still growing but at a slower pace than before covid."
