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Morgan Stanley predicts $61 oil for 2019
Kay Cashman Petroleum News
On May 23, Alaska North Slope crude closed at $67.70 per barrel, down $3.37 from the previous day, dropping below $70 for the first time in weeks.
Although the price of oil has since recovered, many analysts expect oil prices will remain volatile.
A new report from Morgan Stanley says deflationary factors such as rising U.S. shale supplies will keep prices lower than expected in the long term.
The American investment banking and financial services firm decreased its crude oil price forecast for 2019 from $69 per barrel to $61 due to weak global economic growth expectations and rising oil supply worldwide, particularly in the United States. (Both figures are for international benchmark Brent crude, which tends to correlate with the ANS price.)
That said, the Morgan Stanley report has a hefty list of conditions which would have to hold true if crude prices are to remain depressed.
While the firm acknowledges global oil production growth is declining and that U.S. shale output is also dropping, it says “with 200 billion barrels of resource with breakevens in the $40-45 per barrel range, there is an increasingly credible scenario that shale could grow >1 mb/d per year out to 2025.”
And, the firm says, future output levels from U.S. shale could increase if producers continue to make technological breakthroughs and thus reduce their costs.
But some market observers think Morgan Stanley is too optimistic about shale, noting the breakeven costs have remained unchanged even with ongoing improvements in technology.
Morgan Stanley also assumes the industry will be able to quickly overcome transportation and operational bottlenecks. In the meantime, the geopolitical tensions and supply bottlenecks which pushed crude prices up this year are still in place.
First months good for prices All in all, 2019 has been a particularly good year for oil prices, with ANS crude gaining as much as $15 since the beginning of the year. This is primarily due to tight supplies, which were brought about by several factors, including:
* U.S. sanctions leading to a significant drop in exports from Iran, taking a chunk of supply off the markets.
* OPEC’s production controls supporting prices, which are expected to remain in effect for all of 2019.
* Declining output from Russia.
“Much of the tightening of the oil market is due to geopolitics, particularly recently,” Morgan Stanley analysts say in a research note. “We expect this will last for several quarters, but this is nevertheless a fickle basis for an oil price rally. Take that out of the equation and the oil market outlook would be very different.”
There is no doubt that oil prices are subject to periodic influences such as the May 23 impact from a surprise jump in U.S. crude supplies and the IEA trimming its oil demand growth forecast.
Investors should get accustomed to “a hell of a lot of volatility,” ConocoPhillips’ Chief Executive Officer Ryan Lance said during an industry conference in Houston on May 23. Global oil markets generally remain “well supplied” but are “thinly balanced” between supply and demand.
“If we see $80 we kind of tell people: Be prepared, you might see $40 or $50 on the back end,” Lance told the Association of International Petroleum Negotiators. “Cycles are getting shorter, the peaks and troughs are getting significant.”
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