Goldman, Morgan Stanley maintain bullish stance despite price fall

Quantum Commodity Intelligence - Analysts at Goldman Sachs and Morgan Stanley have maintained their bullish view on oil prices, despite a $15/b fall over the last few weeks linked to omicron variant fears and steady supply increases.

In the past week, oil prices have fallen by the largest amount since April 2020, during the initial stages of the Covid pandemic.

ICE Brent futures traded above $84/b at the end of October but were changing hands Friday (1000 GMT) at $69.67/b.

Goldman Sachs acknowledged the demand headwinds created by the omicron variant, which has already been found in 30 countries worldwide and caused many governments to impose additional restrictions for air travellers, as well as OPEC's decision to maintain supply increases on Thursday.

It estimates technical factors likely exacerbated the price selloff.

"In the current environment, pricing pressures pushed Cal 22 WTI between $65/bbl and $60/bbl, a region containing the strike prices of many of the put options purchased by producers to hedge their oil price risk," Goldman Sachs wrote.

However, the bank maintains that lower prices are likely to undermine investment, thus boosting prices next year.

"The bearish demand effects tend to be temporary while the bullish supply effects from discouraged investment tend to be persistent," it added.

"Yet the crude market is pricing in a far larger demand hit than during Delta – equivalent to no planes flying for the next 3 months. This, in turn, is exacerbating the supply problems facing all commodity markets."

The bank told its clients to buy December 2023 Brent, TTF, copper, aluminium, gold and cotton futures to position themselves for a commodity price rally.

Investment bank Morgan Stanley, meanwhile, kept its Brent and WTI forecasts unchanged following Thursday's OPEC decision and after it tweaked them earlier in the week to take into account omicron's potential impact.

It expects Brent to average $82.50/b in the first quarter of 2022 and rise to $90/b by Q3 before easing back to $87.50/b in the final quarter.

For WTI, the equivalent expected moves are $80/b, $87.5/b and $85/b, respectively.

The oil market balance will be softer in the first half of 2022 amid post-Covid supply recovery in both OPEC and non-OPEC and due to the seasonal profile in demand, meaning "it will probably take some time for the market to find its footing again," the bank said.

Morgan Stanley expects OPEC's supply growth to show 270,000 bpd in December and January – not the full 400,000 bpd, due to supply worries in several producing states.

"Across 1Q22 however, this moves our balances by just 0.1 mb/d," the bank said, adding that Thursday's decision by OPEC will only have a "modest" impact on supply.