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Morgan Stanley believes oil prices could be 30% higher in a matter of months
Thursday 28 Apr 2022 Author: Tom Sieber

A higher oil price can be viewed as a tax on economic growth. For all the talk of a transition away from fossil fuels, oil is still key to powering the global economy and prices above $100 per barrel push up the costs for everyone, from the humble motorist at the pump to the largest global business.

There has been a bit of a respite on this front lately, even if Brent, the global benchmark for crude, is still holding just above that $100 mark.

The main reason is a concern about demand, with Chinese lockdowns and the growing fears about a worldwide slowdown influencing prices.

It could be that recent releases from countries’ strategic reserves are having some impact too, though probably only at the margins.

Anyone feeling too relaxed about the situation could be taking their eye off the ball. Going against the prevailing sentiment at present, Morgan Stanley recently lifted its oil price forecast for the third quarter of 2022 from $120 per barrel to $130 per barrel.

Its reasoning is founded on mounting pressures on supply linked to the war in Ukraine (Russia being a major exporter of oil) and Iran with a lack of progress on a new nuclear agreement with the West.

If the investment bank is right, then oil prices are set to surge another 30% in the next few months which would only add to inflationary pressures and put further stress on an already fragile global economy.

Morgan Stanley’s commodities team comment: ‘Our assessment remains that risks to prices are skewed to the upside. We lower our demand growth forecasts, from 3.4 to 2.7 million barrels
per day for 2022.

‘However, we lower our supply forecasts even more, driven by further downside to both Russian and Iranian supply. Combined, this leaves our balances tighter than before. We now see a deficit of around one million barrels per day persisting throughout the year.’

Higher oil prices would be good news for the oil and gas producers – and it will be interesting to note the views of BP (BP.) and Shell (SHEL) when they update on first quarter trading on 3 May and
5 May respectively.

Oil gushing higher would be really bad news for airlines, which are already having to contend with lots of other issues as they struggle in their recovery from the pandemic.

Another move higher in the cost of jet fuel could test existing hedging strategies to their limit at a time when the industry is also facing staffing issues and a significant drop in consumer confidence.

EasyJet (EZJ) posts first-half results on 19 May, while British Airways-owner International Consolidated Airlines (IAG), which recently unveiled plans to base cabin crew for its flagship carrier in Spain to deal with staff shortages, posts numbers
for the first three months of 2022 on 6 May.

One thing is for certain. The events of two years ago when US oil prices briefly turned negative, with sellers of oil effectively having to pay parties to store their barrels, feel a very long way off.

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