Oil supply glut to return with agreement end, shale increase- M. Stanley

Although Morgan Stanley agrees that the recent agreement between the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC members led by Russia to extend their agreed production cuts for another nine months through the end of March 2018 will lead to stock draws in the second and third quarter of this year, these experts believe the correction will be short-lived.

These analysts expect the initial extension to reduce inventories and thus provide some oil price support.

“However, when this agreement ends, and coincides with strong shale growth, the market looks oversupplied again,” they explained in a note to clients.

In this scenario, these experts feel that an acceleration of inventory draws in the third quarter should support oil prices, but still reduced their forecast for the barrel of West Texas Intermediate (WTI) oil to end 2017 at $55, from the prior $60.

With regard to 2018, Morgan Stanley expects that OPEC will not extend the output cuts beyond the first quarter and noted that non-OPEC production had already returned to year-on-year growth with the acceleration driven by shale growth.

“When the end of the OPEC production cuts meet strong shale growth, the market is almost certainly oversupplied again,” they said.

“As a result, we lower our end-2018 WTI price forecast to $55 per barrel, from $60 per barrel before, although we could still see lower prices at some point during 2018,” they concluded.

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