OPEC output cuts mask crude demand weakness - M.Stanley
Quantum Commodity Intelligence – A slowdown in global demand growth will weigh on crude oil prices this year as economic headwinds continue to blunt upside to the market, with OPEC's decision to cut production only partially offsetting the shift, investment bank Morgan Stanley said.
In a research note published Monday, the bank said fundamentals in the oil market had been softer than expected, with global inventory builds running ahead of forecast at around 1.1 million bpd rather than 0.7 million bpd.
The bank has cut its demand forecast by around 0.5 million bpd for the second half of the year to 102.4 million bpd. Excluding growth in China and the aviation industry, the bank said growth in the US and Europe is undershooting its previous expectations.
Updating its end-of-year crude price forecast to $87.50/b – down $7.50/b from its previous report – the analysts said, with demand growth for the year still at a healthy rate by historical standards.
"Demand is still firm enough to keep the global refining system relatively tight, as evidenced by refining margins," the investment bank added.
"Refinery throughput will have risen 1.3 million bpd year-on-year in February… Suggesting that the demand recovery is still there – just not as strong as previously estimated," it said.
The cut to the price forecast runs counter to some other analyst expectations, coming the day after OPEC+ members announced a surprise cut in oil production for May.
Several members, which MS noted typically have a good record of compliance with OPEC policy, combined to reduce production by up to 1.6 million bpd through the month as it looks to offset low prices.
"In many ways, this signals that the fundamental outlook has indeed weakened," Morgan Stanley wrote.
Crude oil futures jumped over 6% after the move, with Brent futures trading near a one-month high of $85.50/b on Tuesday morning.
The bank said it expects some upside to the market because of the move, although the constriction of supply rather than expanding demand is "less bullish" even if it supports a rise in flat prices.
