Home Commercial trading $ 80 oil sends market to demand destruction: Morgan Stanley

$ 80 oil sends market to demand destruction: Morgan Stanley


Pumping jacks at the Belridge oilfield and hydraulic fracturing site which is the fourth largest oilfield in California.

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The current energy market situation looks good for oil bulls.

International benchmark Brent crude broke the long-awaited threshold of $ 80 a barrel on Tuesday, although it has since fallen back to trade at $ 78.47 at 10:30 a.m. in London on Wednesday. West Texas Intermediate was trading at $ 74.73 a barrel around the same time.

With winter coming and a gas shortage in Europe, the demand situation looks promising. But the destruction of demand could be imminent as prices rise, some experts warn.

“Oil prices have become disconnected from the marginal cost of supply. Instead, they are moving up to the level where demand destruction kicks in, which we estimate at around $ 80 / bbl.” That’s what Morgan Stanley wrote in June, and in a note on Tuesday, the bank wrote: “This remains our thesis.”

He added, however, that “the price at which the destruction of demand begins can be devilishly difficult to estimate. We leave our price guidance unchanged for now, but recognize that, on current trends, our upside scenario at $ 85 / b clearly exists. ”

Morgan Stanley predicts a tightening in the global oil supply, citing an average of 3 million barrels of crude per day of inventory draws over the past month, compared to 1.9 million barrels per day taken over the months. precedents of this year.

“These drawdowns are high and suggest the market is more undersupplied than is commonly thought,” bank analysts Martijn Rats and Amy Sergeant said.

In addition, flights and transportation have resumed, with Flightradar data on commercial flights “closing the gap from pre-Covid levels,” they said.

Yet not all signs are bullish.

The World Bank said on Tuesday that the Delta variant slows economic growth in East Asia and Pacific region, and growth forecasts have been revised downwards for most countries in the region. And China faces a potential slowdown with its Evergrande crisis and a growing electricity shortage hitting factories, homes and supply chains.

“China’s economic woes cast a dark shadow on demand for the oil coin and therefore on the price outlook,” warned Stephen Brennock, senior analyst at London-based PVM Oil Associates.

Rising energy prices will also fuel even higher inflation, posing a significant threat to demand.

“Rising oil prices have been one of the main drivers of inflation,” Brennock wrote in a note Tuesday. “And a worsening inflationary situation will act as a brake on the fragile economic recovery and oil consumption. This clearly brings us to the question of the destruction of demand.”

China and India, some of the world’s largest oil importers, this month began selling oil from their strategic reserves in an unprecedented move in an attempt to push down crude prices as costs rise energy was increasing in the region. Although he failed to bring world prices down, he sent an important message.

“The reason for this turn of events is the price,” Brennock wrote. “At over $ 70 / bbl, crude seems to have become too expensive for Beijing and New Delhi…