MS cuts oil forecast on impending surplus, China boost 'played out'

Quantum Commodity Intelligence – Morgan Stanley has trimmed its outlook for Brent crude this year by 9-14% as it no longer sees a tight market for the rest of 2023 and a growing surplus in 2024.

Both downside risk to Russia's supply and upside risk to China's demand have "largely played out," the US bank said, while prospects for 2H tightness have weakened.

"The '2H tightness' thesis does not seem to be playing out, at least not as expected, and what lies immediately beyond that does not suggest to us much tightness either," the investment bank said in a note Wednesday.

With that, the bank expects Brent oil prices to stay in their recent $75-85/b range, "probably skewed towards the bottom-end of that range later this year when the market enters a period of seasonal softness again and OPEC's 'voluntary cuts' come to an end."

The US bank now sees Brent crude at $77.50/b in the second quarter of this year, from $85/b previously.

And will end the year at $75/b, close to where front-month July ICE Brent futures are trading this week, from an $87.50/b earlier forecast.

The bank distanced itself further from the narrative around second-half tightening, which it dropped in an earlier report, and assumed further declines in Russian supply and a continued boost to demand from China's reopening.

China

But with China's crude imports and its refinery runs already back to all-time highs, "there is little room left for post-lock down normalisation."

Data released over the weekend showed China's manufacturing activity unexpectedly slowed, the official PMI back below 50 for the first time since December 2022.

"Similarly, the EU's crude and product embargo's on oil imports from Russia have been in place for some time now, but Russia's oil production is probably down just ~0.4 mb/d from recent peaks."

The bank reckons Russian oil that flows now will probably continue to flow, and it is becoming increasingly unlikely that production will drop any further.

As a result, its demand/supply balance for the 2H 2023 shows a 300,000 bpd deficit, "close to a balanced market."

"Beyond that, we expect oil demand growth to slow down in 2024 as the tailwinds from China re-opening and recovery in aviation will mostly be behind us," and the bank sees a 500,000 bpd surplus next year.

"By the time 2H arrives, prices will most likely reflect expected balances in 1H but given that these don't appear particularly tight either, we lower our Brent forecast to $75/bbl by year-end."