After last week’s sharp sell-off, oil prices showed traders were pricing in a slowdown in demand that resembled a mild recession, Morgan Stanley analysis showed. To be clear, economists at Morgan Stanley expect a “soft landing” for the U.S. economy, saying the U.S. economy will exit 2024 “on sound fundamentals.” But Morgan Stanley commodities strategist Martijn Rats told clients in a note on Monday that there were some troubling signals emerging from the oil market and that a recession-like situation “cannot be completely ignored.” September crude oil futures fell sharply, with Brent and U.S. crude notching their worst weeks since October 2023 on Friday. Global benchmark prices were below $72 a barrel on Monday, while U.S. benchmarks were hovering below $69 a barrel. Morgan Stanley expects Brent crude oil prices to fall back from mid-$80 a barrel as seasonal summer demand weakens and OPEC supply is expected to increase in the fourth quarter. “Having said that, prices have fallen faster and deeper than we expected,” Ratz told clients. Morgan Stanley expects a surplus of about 1 million barrels per day in 2025. at that level. The bank found that the most suitable times were December 19, 2019, March 2020 and June to September 2009, the onset of the Covid-19 pandemic and financial crisis respectively. “Certainly, this paints a picture of weakness,” Ratz said. “If the fit with these periods persists, further declines are likely in the future.” While price trajectories may be similar, the current demand outlook is not on par with the 20 million barrels per day plunge in early 2020 or the mid-2008 collapse, analysts said. A contraction of 3 million barrels per day is a far cry. @LCO.1 @CL.1 3M Brent Mountain vs. WTI “However, the above comparison suggests that the oil market is discounting a substantial deterioration in supply and demand conditions,” Rats said, either due to recession-like weakness in demand or both. Combined with increased OPEC supply, demand is weak. The investment bank said the difference between the first- and twelfth-month Brent contract pointed to a build in crude inventories in developed economies of 150 million barrels. During the past five U.S. recessions, these inventories have increased by 150 million to 220 million barrels. “This implies a slowdown in demand, similar to a mild recession,” Ratz wrote. Morgan Stanley said the build-up in crude stockpiles in developed economies would mean a global build of 375 million barrels, or 100 barrels a day for the full year. Thousands of barrels. The investment bank said the build in inventories suggested by crude oil futures was likely due to increased supply rather than a slowdown in demand due to the recession. OPEC+ plans to increase production starting in December, with strong output from the United States, Canada, Brazil and Guyana. Rats wrote: “While rising OPEC production is a key factor behind our 2025 surplus forecast, we are reluctant to think that this justifies the recent price decline.” After all, although OPEC+ has made it clear that the production increase depends on market conditions, prices Still down. The organization has postponed it for two months. Morgan Stanley sees more historical precedent in 2013 and 1992-1993, when weak demand combined with rising OPEC supply weakened the market balance, but there was no “recession-like deterioration.” “It’s best to keep an open mind,” Ratz wrote. “Demand indicators are concerning, but it is too early to consider ‘recession-like’ demand as the base case,” he said.
Morgan Stanley says oil prices show demand is slowing to the pace of a mild recession | Real Time Headlines
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