Morgan Stanley raises oil forecasts by $10 citing market deficit

Morgan Stanley increased its third- and fourth-quarter price forecasts for global benchmark Brent crude by $10 a barrel due to a greater-than-expected supply deficit driven by Russia and Iran.

The bank raised its third quarter estimate to $130 a barrel and predicted a supply deficit of about 1 million barrels a day persisting throughout the year, according to a note dated April 21. While oil markets have short-term demand headwinds, they are outweighed by supply issues, it added.

Morgan Stanley increased its forecast for daily Russian crude and condensate production losses to 2 million barrels, up from 1 million barrels, because of a widespread boycott of its products following Moscow’s invasion of Ukraine. The war is nearing its third month despite diplomatic efforts for a cease-fire.

Russian production has already fallen by about 900,000 barrels a day in the first half of April, earlier than expected, Morgan Stanley analysts including Martijn Rats and Amy Sergeant said. The bank added that there’s a “high risk” the European Union will enact an import embargo on Russian crude.

Morgan Stanley scaled back its assumption for returning Iranian supply, citing the lengthy negotiations without a nuclear deal being agreed. The bank had expected flows to climb by about 1 million barrels a day between mid- and end-2022, but has lowered that forecast to 500,000 barrels a day. The likelihood of an agreement is now 50/50, the bank said.

Morgan Stanley cut its oil demand growth forecast to 2.7 million barrels a day this year from 3.4 million barrels a day. In the short term, the market is contending with negative GDP revisions, the effects of China’s Covid Zero policy and a large release from the US Strategic Petroleum Reserve.