Recently, Brent crude oil fell to the 100-110 range after breaking through the 120 mark in June. Is the crude oil super cycle about to peak?
Morgan Stanley pointed out in its latest report that although supply in the crude oil market is still tight, as high oil prices begin to destroy demand, as well as factors such as interest rate hikes and recession, supply and demand will gradually balance out and oil prices will begin to fall. Then as the economy recovers from the recession, oil prices will rise again.
Morgan Stanley lowered its oil price forecast for the third quarter of this year by US$20 to US$110/barrel. In the first quarter of 2023, oil prices dropped to the lowest point of US$95/barrel, and then rose back to US$110/barrel in the second half of the year.
There are signs that demand is beginning to be destroyed
Amid continued tight supply and insufficient refining capacity, ICE gasoline and NYH gasoline prices reached highs of US$187/barrel and US$180/barrel respectively in mid-June. Morgan Stanley pointed out that if oil prices exceed this level, demand destruction will occur, and demand destruction means that the crude oil super cycle may peak.
Morgan Stanley pointed out that various signs reflect this. The U.S. ISM manufacturing industry was weak in June, hitting a two-year low, and the decline in ISM may have a significant impact on crude oil demand. History shows that when the ISM is above 50 and rising, U.S. crude oil demand typically increases by 21,000 barrels per day per month. When the ISM is below 50 and continues to decline, it will result in a decrease in monthly oil demand of 86,000 barrels per day.
Second, seasonal growth in U.S. gasoline demand has been particularly bleak, well below pre-pandemic levels. UK weekly fuel sales levels have fallen to their lowest level in 2021 since the start of the year. As for other regions, the Joint Oil Database JODI released a report showing that the rebound in global oil demand in 70 countries will stall in May.
At the same time, central banks are actively raising interest rates in response to soaring inflation caused by commodities. Among the 38 central banks around the world, 29 (77%) have raised interest rates significantly in the past six months, which is the highest level in 40 years.
Morgan Stanley pointed out that driven by various factors such as high inflation and aggressive interest rate hikes, GDP expectations in all major regions have declined rapidly. There is almost no reason to indicate that crude oil demand will grow, and actual crude oil demand has also begun to be lower than expected. Morgan Stanley will forecast crude oil in 2022 Demand growth will drop from 2.2 million barrels/day to 2 million barrels/day, and from 2.7 million barrels/year to 1.8 million barrels/day in 2023.
Crude oil supply and demand will tend to be balanced
From a supply side, the crude oil market remains quite tight, and despite the recent weakness in spot prices, supply growth in the oil market has lagged behind the pace of demand growth. Additionally, physical and futures spreads reached unprecedented levels, both signals that conditions in the oil market remain tight.
At the same time, various problems have arisen on the supply side. OPEC’s production capacity is close to its limit, and it is difficult for Iran’s exports to rebound. The production environment in Libya remains unstable. U.S. shale oil production capacity is growing, but at a rate that is approaching its limit.
With the impact of reduced demand outweighing the impact of tight supply, Morgan Stanley expects crude oil inventories to begin to grow, about 200,000 barrels per day, and points out that in the second half of 2022 and 2023, the crude oil market supply and demand will generally balance.
Therefore, there is a risk that oil prices will tilt downward in the coming months. Morgan Stanley has lowered its short-term price forecast, lowering Brent crude oil prices to US$100 per barrel by the end of this year. However, when the economy recovers after a period of slowdown, crude oil demand will start to pick up, rising to $110/barrel by the end of 2023.
Goldman Sachs continues to be bullish, oil prices will rise to 130 by the end of the year
Contrary to Morgan Stanley, Goldman Sachs is still sparing no effort to be bullish, saying that oil prices have strong upward risks, and Brent crude oil may rise to US$130 per barrel in the second half of the year.
Jeff Currie, chief commodities analyst at Goldman Sachs, pointed out that the physical market is trading at a higher price than the futures market. On Thursday, physical Brent crude oil prices were around $112 a barrel on the spot market, while futures prices were at $90. This does not mean that oil prices will fall, it means that consumers are willing to pay a high premium to have oil delivered now rather than in the future.
Currie added that despite the slowdown in demand growth, supply remains severely constrained due to years of underinvestment and market demand remains higher than supply, currently maintaining a 1 million barrels per day supply and demand deficit. Regarding the impact of the economic slowdown, a clear feature of a deep recession is futures contango. This has not yet been seen, and crude oil futures prices remain lower than spot prices.
But Currie warned that commodity price volatility remains high in the near future.
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