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Morgan Stanley flags risk oil price rally will lead to a fall

Published 06/08/2020, 05:59 AM
Updated 06/08/2020, 06:00 AM
© Reuters. Crude oil storage tanks are seen in an aerial photograph at the Cushing oil hub

© Reuters. Crude oil storage tanks are seen in an aerial photograph at the Cushing oil hub

(Reuters) - Oil prices have quickly climbed to levels that raise the risk of price falls as demand is fragile, Morgan Stanley (NYSE:MS) said on Monday, as benchmark crude hit its highest in three months.

Oil climbed on Monday after major producers agreed to extend a deal on record output cuts to the end of July and as China's crude imports hit an all-time high in May. [O/R]

The bank said its base case expectation remained that oil markets will be progressively under-supplied in the second half of this year and inventories will shrink in the fourth quarter and first quarter next year.

But it said in a note the rally "appears mostly supply- rather than demand-driven, and it is questionable how strong refinery runs can increase against this backdrop".

Refining margins are historically low and inventories of oil products remain elevated relative to crude oil inventories, suggesting the demand recovery is relatively fragile.

Consumption is unlikely to return fully to pre-coronavirus levels until the end of 2021, Morgan Stanley said, adding that inventories are unusually high after the increases in April.

Growth from U.S. shale could return to levels that are too high, if the U.S. benchmark WTI trades too far above the low-$40s, it added.

The bank also sees a risk to OPEC's compliance with supply cuts that have led to unusually high levels of spare capacity.

© Reuters. Crude oil storage tanks are seen in an aerial photograph at the Cushing oil hub

"When the cuts are eventually unwound, production could rise sharply," it said.

Latest comments

i think they have a lot of short positions agains oil and they need a fall of oil in order to make money.
what is purpose that OPEC increase output? beat US shale to die. So oil peice will be manipulated at certain range.
Don't trust them, they always come with their analysis when there is no one to catch the ball. I think they read their calendar upside down.!!
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