Our Global Commodities Strategist Martijn Rats discusses the
ongoing volatility in the oil market and potential macroeconomic
scenarios for the rest of this year.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan
Stanley’s Global Commodities Strategist. Today on the podcast –
the uncertainty in the oil market and how it can play out for the
rest of the year.
It’s Tuesday, April 29th, at 3pm in London.
Now, notwithstanding the energy transition, the cornerstone of
the world’s energy system is still the oil market; and in that
market, the most important price is the one for Brent crude oil.
Therefore, fluctuations in oil prices can have powerful ripple
effects on various industries and sectors, as well as on the
average consumer who, of course, pays attention to gasoline
prices at the pump. Now with that in mind, we are asking the
question: what's been happening in the global oil market
recently?
Earlier this month, Brent crude oil prices dropped sharply,
falling 12.5 per cent over just two trading sessions, from around
75 dollars a barrel to close to 65 dollar a barrel. That was
primarily driven by two factors: first, worries about the impact
of trade wars on the global economy and therefore on oil demand,
after the Trump administration’s announcement of reciprocal
tariffs.
Secondly, was OPEC’s announcement that, notwithstanding all the
demand uncertainty that this created, it would still accelerate
supply growth, progressing not only with the planned production
increases for May; but bring forward the planned production
increases for June and July as well. Now you can imagine, when
OPEC releases extra production whilst the GDP outlook is
weakening, understandably, this weighs on the price of oil.
Now to put things into context, two-day declines of 12.5 per cent
are rare. The Brent futures market was created in 1988, and since
then this has only happened 24 times, and 22 of those instances
coincided with recessions. So therefore, some commentators have
taken the recent drop as a potential sign of an impending
recession.
Now while Brent prices have recovered slightly from the recent
lows, they’re still very volatile as they continue to reflect the
ongoing trade concerns, the economic outlook, and also a strong
outlook for supply growth from OPEC and non-OPEC countries alike.
The last few weeks have already seen unusually large speculator
selling. So with that in mind, we suspect that oil prices will
hold up in the near-term. However, we still see potential for
further headwinds later in the year.
In our base case scenario, we expect that demand growth will slow
down to approximately 0.5 million barrels a day year-on-year by
the second half of 2025, and that is down from an an initial
estimate earlier in the year when were still forecasting about a
million barrel a day growth over the same period. Now this
slowdown – coupled with an increase in non-OPEC and OPEC supply –
could result in an oversupply of the market of about a million
barrels a day over the remainder of 2025. Now with that outlook,
we believe that Brent prices could eventually drop further down
into the low-$60s.
That said, let's also consider a more bearish scenario. Oil
demand has never grown continuously during recessions. So if
tariffs and counter-tariffs tip the economy into recession, oil
demand growth could also fall to zero. In such a situation, the
surplus we're currently modeling could be substantially larger,
possibly north of 1.5 million barrels a day. Now that would
require non-OPEC production to slow down more severely to balance
the market. In that scenario, we estimate that Brent prices may
need to fall into the mid-$50s to create the necessary supply
slowdown.
On the flip side, there's also a bullish scenario where we and
the market are all overestimating the demand impact. If oil
demand doesn't slow down as much as we currently expect and OPEC
were to revert quite quickly back to managing the supply side
again, then inventories would still build but only slowly. Now in
that case, Brent could actually return into the low-$70s as well.
All in all, we would suspect that the twin headwinds of
higher-than-expected trade tariffs and faster-than-expected OPEC+
quota increases will continue to weigh on oil prices in the
months ahead. And so we have lowered our demand forecast for the
second half of the year to just 0.5 million barrels a day,
year-on-year. And we’ve also lowered our prices forecasts for
2026; we’re now calling for $65 a barrel – that’s $5 a barrel
lower than we were forecasting before.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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