Morgan Stanley: OPEC Cannot Save Market Alone

OPEC and other major oil producers have taken on an ambitious battle to rebalance the oversupplied oil market, but despite the best intentions, their efforts are not enough, Morgan Stanley, the leading global financial services firm, warns.

In a research report, the Wall Street bank called on US shale-oil producers to join in efforts to tackle the global supply glut that has pummeled prices since the summer of 2014, Market Watch reported.

“If OPEC does not balance the market, the oil price will have to force it somewhere else, most likely in US shale. For a chance of a balanced market in 2018, the US rig count can no longer grow and possibly needs to contract 150 rigs. Given current break-evens, this requires WTI between $46-50,” the Morgan Stanley analysts said in the report.

Cementing their downbeat assessment of the oil market, they significantly downgraded their 2017 forecasts for both US West Texas Intermediate and Brent. They now see WTI trading at $48 a barrel at the end of the year, down from $55 expected previously. For Brent, they cut their forecast to $50.5 per barrel from $57.5.

Oil prices have been volatile in recent months, even as the Organization of Petroleum Exporting Countries and other major producers—including Russia—have eased output.

They initially agreed to a six-month pact running from January until the end of June, but as prices remained stubbornly low, they extended the accord into the first quarter of 2018.

The OPEC and non-OPEC members have signed up to cut output by a collective 1.8 million barrels a day, hoping it will bring global oil inventories to a five-year average. The Saudi Arabian and Russian oil ministers have even pledged to do “whatever it takes” to balance the market.

However, there may be a limit to “whatever it takes”, according to the Morgan Stanley analysts.

“Although compliance has been healthy, OPEC’s production cuts have so far made little dent in inventory levels, which are still roughly as high as a year ago,” they said.

“To support prices in the mid-$50s, OPEC would probably need to lower production by another 200,000-300,000 barrels a day and extend the output agreement to end-2018. We find this unlikely,” they added.