Why Morgan Stanley Has Slashed Oil’s Price Forecast

Morgan Stanley slashed oil’s long-term price forecast

On July 2, Morgan Stanley (MS) reduced its long-term price forecast for Brent crude oil by $5 to $60 per barrel. Morgan Stanley lowered oil’s price forecast even after OPEC agreed to go forward with an output cut agreement until March 2020.

For the next three quarters, the bank expects Brent crude oil to be ~$65 per barrel, lower than the $67.5 per barrel it previously estimated. Moreover, the bank thinks the oil market’s supply and demand are in equilibrium.

Why Morgan Stanley Has Slashed Oil’s Price Forecast

Oil inventories and their five-year average

In the week that ended on June 14, US crude oil inventories were 5% higher than their five-year average compared to their surplus of 7% to the five-year average in the previous week.

Oil prices and the inventories spread usually move inversely. If the inventories spread contracts further, oil prices could see a rise. The inventories spread is the difference between oil inventories and their five-year average.

Oil prices and energy stocks

Since the EIA (U.S. Energy Information Administration) released its inventory data on June 26, US crude oil August futures have fallen 5.3%. Oil demand expectations may have dragged on US crude oil prices. Moreover, the market had expected an increase in the oil output cut.

From June 26 to July 2, oil-weighted stocks Occidental Petroleum (OXY), Hess Corporation (HES), and California Resources (CRC) fell 3.3%, 4.2%, and 6.5%, respectively. They were among the underperformers. Occidental Petroleum, Hess, and California Resources operate with production mixes of 74.4%, 68.2%, and 78.2%, respectively, in commodities linked to oil prices. The change in the inventories spread will likely be important for these energy stocks.

Changes in inventory levels

On July 3, the EIA is scheduled to announce last week’s US crude oil inventory data. A fall of equal to or more than ~5.1 MMbbls (million barrels) could help the inventories spread contract. A Reuters poll suggests a potential fall of 2.96 MMbbls. If the EIA reports a figure that’s in line with the poll, the inventories spread will remain unchanged. However, on July 2, the American Petroleum Institute reported that US oil inventories had declined by 5 MMbbls in the last week. The change in the inventory level will also affect the S&P 500 Index. Energy stocks make up ~5.2% of the S&P 500 Index.