MS on oil, looking for high volatility in oil prices:
- Brent has largely converged to our equilibrium estimate of $45/bbl.
- From here, large oscillations around this anchor price are likely
(bolding mine).
In very brief from the research piece on the conflicting inputs that will ensure price swings ahead:
POSITIVES:
When:
- strong money supply growth
- economic recovery
- a weaker dollar
- improving prospects of inflation
commodities have invariably done well in the past.
At the moment, these conditions are either already in place or forecast by our economics colleagues.
As a result, commodities are enjoying a powerful rally
Combined with OPEC managing supply and US shale struggling, this has also given oil prices a boost.
To CLASH WITH THE NEGATIVES
However, risks are building
- demand is improving but remains fragile and is unlikely to exceed pre-Covid levels until late 2021 at the earliest.
- Also, with 12-month forward WTI now at $42/bbl, US E&Ps can lock in prices at which substantial shale volumes can be developed again. When US drilling activity picks up again, we suspect that several OPEC+ member will not be willing to keep production constrained - an orderly unwind may be hard to orchestrate.
- the oil market has recently benefitted from China's imports running 2-3 mb/d above normal levels. With inventories in the country building, it is increasingly uncertain how long that will last
- Finally, the inventory overhang remains large.
Large price swings create trading opportunities; the points made by MS above provide a handy checklist to watch for news and how it will impact.
