(Reuters) – Increasing trade tensions and a broader economic slowdown, along with falling oil demand, will overtake supply shortages and lead to lower oil prices, Morgan Stanley said in a research note.
Brent and West Texas Intermediate (WTI) crude futures on Wednesday hit their lowest levels since mid-January at $59.45 and $50.60 per barrel, respectively, as U.S. crude inventories surged amid record production, and as a global economic slowdown started to hit energy demand.
Oil markets have moved into bear territory as defined by a 20% fall peaks touched in late April.
“Demand is weakening much more rapidly than we had expected. Considering recent data, both specific to the oil market as well as macro-economic, this seems increasingly likely,” Morgan Stanley analysts said in a note dated Wednesday.
Incoming data on oil demand for March and April has been disappointing, the investment bank said, pointing to consumption statistics from the United States, Japan, South Korea, Australia, China, India, Brazil and Thailand, which collectively “account for 48% of global oil demand”.
“When refining margins and product crack spreads fall in a declining crude oil price environment, this typically signals weakening demand. At the moment, this is exactly what we are seeing,” the analysts said.
The bank also lowered its oil demand growth forecast for 2019 from 1.2 million barrels per day (bpd) to 1.0 million bpd, subsequently lowering its Brent price forecast for the second half of 2019 to $65-$70 per barrel, from $75-$80.
“Our expectation had been that falling OPEC supply, driven by further declines in Iran and Venezuela, combined with demand growth in-line with recent trends, would keep the oil market in deficit,” Morgan Stanley said.
With weaker assumptions for oil demand, however, “our call for Brent to rise into the upper-half of the $70s has become hard to sustain,” the bank said.
Other banks also have a word of caution about oil demand growth and the impact of economic uncertainties on oil prices.
Bank of America Merrill Lynch said this week that “global oil demand growth is running at the weakest rate since 2012” at below 1 million bpd, and that this was “leading the selloff” in oil prices.
Escalating trade wars and weaker activity indicators have finally caught up with oil market sentiment, Goldman Sachs said in a note on Monday, adding that growing macro uncertainties and rising U.S. output would offset supply constraints from Iran and Venezuela.
(Reporting by Nallur Sethuraman in BENGALURU; Editing by Tom Hogue)