Morgan Stanley raises oil price forecast

Morgan Stanley has raised its oil price forecast for this year. It now expects the price of Brent crude to be in the $80-85 per barrel range this year, up from its previous forecast of $75-80 per barrel. Why the change? According to experts, oil is "well supported" after the recent changes in the market.

Although it is worth noting that Brent is now almost at $83, in fact the improvement made by analysts at the US bank shows that they are now cautiously optimistic about the black gold.

As they explain, Brent has been hovering around $80 a barrel so far this year, but several indicators have been stronger than expected, leading them to raise their forecasts.

For example, they note that calendar spreads have recovered, commodity crack spreads and refining margins have improved, the Dated-to-Frontline swap is trending higher, the CFD curve structure has gone further into backwardation, and physical spreads have slowly started to rise again - all signs of a healthy and tight market.

Nevertheless, they note, the most important factor is inventories. In January, they found a 1.5 mb/d decline in inventories and a 2.1 mb/d decline in crude inventories, partially offset by a 0.6 mb/d increase in refined products inventories. This contrasts with our forecasts at the beginning of the year, which pointed to an increase in crude oil and refined products inventories by about 0.2 mb/d.

"The oil market is a noisy system with imperfect information, and one month's data does not necessarily change the fundamental outlook. Nevertheless, the oil market has been tighter than expected and this has implications for the future," they commented.

Hence the change in forecasts. Supply has been lower than expected, partly due to OPEC but also the US. At the same time, demand looks resilient, with upward revisions to flight schedules pointing to higher than expected jet fuel consumption this summer.

In this regard, they note that jet fuel consumption included in flight schedules for the second and third quarters is now about 180,000 bpd higher than in early January.

"Given the current flight schedules, we expect jet fuel consumption in August-September to once again exceed the pre-crisis peak at around 8 mb/d compared to the previous estimate of 7.8 mb/d," they emphasize.

That is why they also revised their estimate of global demand growth from 1.3 to 1.5 million bpd, as well as their forecast of non-OPEC supplies from 1.7 to 1.5 million bpd. Regarding the latter, they explain that lower-than-expected supply "has been another key factor supporting the oil market of late."

Morgan Stanley analysts add that since OPEC compliance has been encouraging so far, they now expect the oil market to remain balanced this year, rather than recording a small surplus as previously expected. In fact, their forecasts have shifted from a small surplus to a small deficit, and they now expect the market to run a deficit of -0.2 million barrels per day this year.

The concerns have not gone away

Despite the improved outlook for oil, the experts also note that "this does not mean that some of the concerns we pointed out earlier have completely disappeared."

Indeed, they recall that OPEC`s market share is trending downward and the producer group has accumulated a significant amount of spare capacity. Thus, they recognize that their forecast that stocks will remain stable rather than increase this year depends on OPEC's willingness to continue limiting production.

They explain that they have built some caution into their 2025 price forecasts for this reason.

"Nevertheless, we have some confidence that OPEC will indeed balance the market in the coming quarters," they say.

"Since the market has been tighter this year than we expected, it will be easier for OPEC to do so. With that in mind, the outlook for prices has become more robust."