Morgan Stanley: This Oil Rally Won’t Last

Oil prices have likely risen too fast too soon with the market focusing on supply cuts, while global oil demand may not return to pre-COVID-19 levels before the end of 2021, according to Morgan Stanley.

The oil price rally in recent weeks “appears mostly supply- rather than demand-driven, and it is questionable how strong refinery runs can increase against this backdrop,” the investment bank said in a note on Monday, as carried by Reuters.

While the market is heading for deficit in the second half of the year, there are a lot of inventories – at an unusually high level – which will start shrinking in Q4 and in the first quarter next year, Morgan Stanley said.  

Despite the continuous market-fixing efforts in supply by the OPEC+ group, the world’s consumption of oil is unlikely to return to the levels before the coronavirus pandemic until late next year, according to the bank.

Other concerns about an oil price correction include U.S. shale restarting too much production as prices rise, as well as a sharp rise in oil production when OPEC and allies start unwinding the cuts, Morgan Stanley says.

Early on Monday, oil prices hit three-month highs after OPEC+ agreed on Saturday to extend the record production cuts of 9.7 million bpd by one month through the end of July. Prices began to slip in by mid-morning.

According to the original agreement reached in April, OPEC+ was to cut 9.7 million bpd in combined production for two months—May and June—and then ease these to 7.7 million bpd, to stay in effect until the end of the year. Then, from January 2021, the production cuts would be further eased to 5.8 million bpd, to remain in effect until end-April 2022.

Later on Monday, however, prices reversed course and were down by around 1 percent at 8:00 a.m. EDT during the OPEC+ video news conference at which Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said the extra cuts that the Kingdom and its Gulf allies had promised for June on top of their commitments would not be extended to July.

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