Summary List Placement
Oil is set to stage a recovery after one of the worst years for the commodity that has been the backbone of economic growth for the past century.
In 2020, oil took a huge hit, with tensions in the Middle East remaining from 2019 followed by the lockdown-induced evaporation of travel – demand fell through the floor. By April, Western Texas Intermediate prices went negative, with the WTI hitting lows of -$40.32 a barrel, making the barrel storing the oil more valuable than the crude itself.
However, in 2021, oil’s fortunes are changing. Leading banks including Morgan Stanley and Goldman Sachs are optimistic on the short term outlook, according to research notes published this week. Oil prices have already rallied sharply this year, with global benchmark Brent trading at a post-COVID high of $55 a barrel – a far cry from the lows around $27 a barrel last spring.
“Our oil strategists upgraded their oil price forecasts, seeing a backdrop of improving fundamentals, the return of inflation and further dollar weakness translating into oil prices moving higher,” Morgan Stanley said in a note published Monday.
The Morgan Stanley team upped their oil price forecasts by $5 for 2H 21 and 2022.
Morgan Stanley base their bullish oil position on these five reasons:
Oil market in balance: Oil demand is ~6mb/d below last year’s levels but the physical market is still in healthy territory, the note said, judging by observable inventories and with major crude benchmarks in backwardation.
Demand set to recover: With markets still broadly down 18% on pre-Covid levels, and in particular aviation reduced 44%, the expected 2021 vaccine-fueled economic recovery should boost oil demand, the note said. The strategist estimate total product demand to recover ~4mb/d by 4Q, it added.
OPEC+ meeting a positive: Continued cohesion within OPEC+ and last week’s announcement of a supply cut “improves the narrative around commodity prices,” the note said, highlighting the limited spare capacity from non-OPEC countries.
Macro backdrop is favorable: Rising inflation expectations and the weakening USD usually aid commodity prices, including oil, the note said.
Short-term signals in positive territory:
Brent above its 25-day moving average
Time spreads are positive and showing positive momentum
Positioning is improving from low levels
Goldman Sachs has accelerated its bullish oil price expectations by six months, forecasting Brent prices will average $60/bbl in 2Q21 and reach $65/bbl in July vs. December previously, according to a note published Wednesday.
In addition, the oil and gas sector offers very compelling valuations, the note said, with relative dividend yield of 1.75x – still at the upper end of its historical range.
“On top, the average FCF yields of 9% is nearly double the market’s, and price-to-cash flow below 4x is also at a discount to historical levels,” it added.
With this positive outlook for oil, Morgan Stanley is getting bullish on certain oil majors, including Total and Shell. However, the team are bearish on Repsol and ENI, the note highlighted.
Morgan Stanley also remain constructive on mining, the note said, arguing that it will be a reflation beneficiary, “offering cheap/reasonable valuations and …read more
Source:: Business Insider