In a recent report, Morgan Stanley presented a compelling case for anticipating lower global crude oil prices in the coming years. While the investment bank estimates that Brent crude prices may average around $80 per barrel in the first quarter of this year, it predicts a drop to $77 per barrel by mid-year. Looking ahead, Morgan Stanley expects prices to weaken further, reaching $75 per barrel by the end of this year and potentially touching $72.50 per barrel by 2025.
To support their projections, the bank dedicated ten pages of the report to exploring various equations for determining demand responses before making these forecasts. While they did include a “bull case” scenario that could see oil prices in the mid-$90s, most of the scenarios presented in the report point to lower price ranges.
Central to Morgan Stanley’s forecast is the belief that non-OPEC supply growth will outpace rising global demand. Additionally, the bank suggests that OPEC+ may make further moves to extend or deepen production cuts this year, similar to actions taken in 2023.
Morgan Stanley’s commodity analysts acknowledge a disappointing fourth-quarter 2023 demand, but note that it was outweighed by the relentless growth in non-OPEC supply. This trend has contributed to a significant weakening in the structure of the market and physical differentials for crude oil, signaling a broader weakness in the oil complex.
The report highlights that the call on OPEC oil is expected to decrease by approximately 600,000 barrels per day this year as non-OPEC nations capture a larger market share. While this could typically result in much weaker prices, Morgan Stanley emphasizes that OPEC cohesion remains strong.
A crucial metric in the report is the projected demand for oil from the nine OPEC countries along with Russia, which are subject to supply quotas. This group’s demand decreased from 33.8 million barrels per day in 2022 to 32.7 million barrels per day last year. Looking forward, Morgan Stanley anticipates a further decline to 31.6 million barrels per day in 2024 and 31.4 million barrels per day in 2025.
Lastly, the bank expects global oil stocks to increase by 500,000 barrels per day this year, leading to a “modest oversupply” in 2025.
Overall, Morgan Stanley’s insight into the oil market suggests a downward trajectory for crude oil prices over the next few years, primarily driven by the dynamics of non-OPEC supply growth, OPEC+ production cuts, and other factors outlined in their comprehensive report.
Global Oil Growth Trends
The long-term underlying trend for oil growth is estimated to be between 1.3 million b/d and 1.4 million b/d, based roughly on population growth, according to a recent report. As the global population continues to increase by 1 billion every 13 to 14 years, crude consumption has risen by approximately 4.5 bbl/person since the 1970s.
Additionally, another indicator of oil growth can be seen through the advancement of global GDP. In the past, it took around 700 bbl of oil to generate $1 million of global GDP, but this number has now fallen to about 400 bbl. If this trend continues, it could result in an annual demand savings of about 1 million b/d.
While global population growth is slowing down, if the consumption rate of approximately 4.5 bbl/person remains, a population increase of 1 billion would suggest a demand growth rate of about 900,000 b/d. Although slightly lower than the long-term trend, it is still significant.
It is worth noting that the report does not align with those forecasting a peak global demand level.
Despite modest growth from China, projections indicate that consumption will reach approximately 108 million b/d in early 2030, representing a growth rate of less than 1 million b/d in the second half of the decade.
However, the report does not give much consideration to the substitution of electricity for fossil fuels. The bank suggests that electricity usage will reduce oil growth by about 200,000 to 300,000 b/d in the coming years. On the other hand, the bank is optimistic about energy developments in the petrochemical corridor and anticipates a surge in LPG, ethane, and naphtha by approximately 600,000 b/d this year.
Furthermore, there is a belief that jet fuel demand will rise by around 500,000 b/d (an initial increase of 9%) early this year compared with the previous year. Although this growth rate may slow to 4% to 5% later in 2024, there is still a projected need for approximately 7.6 million b/d of aviation fuel.
