Morgan Stanley abandons on greater oil prices this year

Morgan Stanley is calling it quits on its optimistic forecast for oil prices in 2016, cutting down its year-end target by more than half as it accepts the global oversupply in oil isn’t going away anytime soon.
14 Feb 2016 – Market Watch

The bank’s analysts, Adam Longson, the head of energy commodity research, said BrentUK:LCOJ6 the international benchmark, will continue to fall through the year and average $29 a barrel in the fourth quarter. That implies prices are facing a further 17% plunge from trading levels on Thursday of around $35.

“Weaker-than-expected demand, higher-than-expected supply, rising inventories and increased hedging incentives all work to delay rebalancing, and slow the rise in prices immediately thereafter,” they said in a report.

“We continue to believe that the oil price beyond 2017 needs to be higher to balance the market. In many cases, this pace of recovery matters as much as the ultimate price,” they added.

The bank forecast in January that Brent would rebound to $59 by year-end and average $49 for the year. But with the downbeat outlook for a supply-and-demand balance, it now sees prices stuck around $30 a barrel until the second quarter of 2017 and until prices eventually turn and climb above $50 toward the end of next year.

The analysts’ reversal comes as oil futures have jumped around 10% over the last two days. But prices turned lower during Thursday trade on fresh doubts over the potential for a production cut among major producers.

According to the Morgan Stanley analysts, a sharp rise in the dollar also should prevent an oil rebound — an argument the bank also hashed out last month, when it warned of oil in the $20s “simply due to currency.”

The front-month contract for Brent has lost 6% through Wednesday, even with a 7.1% leap that day, and has plunged 35% over the past year. The U.S. benchmark, West Texas Intermediate US:CLH6 has slumped nearly 13% through Wednesday and more than 33% from a year ago, based on the front-month contract.

The lower-for-longer prediction has implications for several asset classes, the Morgan Stanley analysts said. For example, prices of U.S. high-yield credit and U.S. large-cap bank stocks mostly reflect the depressing path for oil, while foreign-exchange rates for oil-dependant economies and shares of U.S. energy firms are at risk of more losses.


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