After last week’s sharp sell-off, oil prices suggest traders are pricing in a slowdown in demand that looks like a mild recession, according to a Morgan Stanley analysis. To be clear, Morgan Stanley economists expect a “soft landing” for the US economy, saying it will emerge from 2024 “on a fundamentally sound footing.” But there are some worrisome signals in the oil market and a recession-like scenario “should not be completely dismissed,” Martijn Rats, commodities strategist at Morgan Stanley, told clients in a note on Monday. Crude oil futures fell sharply in September, with Brent and US crude on Friday posting their worst weeks since October 2023. Brent and US crude are down more than 15% for the quarter . The global benchmark traded below $72 a barrel on Monday, while the US benchmark traded below $69 a barrel. Morgan Stanley expected Brent to retreat from the mid-$80s a barrel as summer seasonal demand weakens and OPEC supplies are expected to rise in the fourth quarter. “Because the price drop was faster and more intense than we expected,” Rats told clients. Morgan Stanley forecasts a surplus of about 1 million barrels per day in 2025. The investment bank cut its forecast for Brent to $75 from $80 previously for the fourth quarter, with the global benchmark remaining at that level until the end of 2025. Demand Morgan Stanley looked for similar patterns in the past 35 years of Brent oil price data. The bank found the best matches are December 19, 2019, to March 2020 and June to September 2009, the start of the Covid-19 pandemic and the financial crisis, respectively. “Of course, that paints a weak picture,” Rats said. “If matching these periods continues, it could be further down.” While the price trajectory may be similar, the current demand outlook is nowhere near the 20 million bpd collapse seen in early 2020 or the 3 million bpd contraction in mid-2008, the analyst said. @LCO.1 @CL.1 3M mountain Brent v. WTI “Nevertheless, the above comparisons suggest that the oil market is discounting a significant deterioration in supply/demand conditions,” Rats said, either due to recession-like demand weakness or a combination of subdued demand and rising supplies from OPEC. The spread between the first-month and twelfth-month Brent contracts suggests that crude oil inventories in developed economies will rise by 150 million barrels, according to the investment bank. During the past five U.S. recessions, these inventories have increased by 150 to 220 million barrels. “This implies a slowdown in demand akin to a mild recession,” Rats wrote. This increase in crude stockpiles in developed economies would mean a build-up of 375 million barrels worldwide, or 1 million barrels per day over a full year, according to Morgan Stanley. Supply Rising supplies, rather than slowing demand due to a recession, may be responsible for the build-up of inventories that signal crude oil futures, according to the investment bank. OPEC+ plans to raise output from December and production in the US, Canada, Brazil and Guyana is strong. “While OPEC production growth is a key factor behind the surplus we project for 2025, we would hesitate to argue that this justifies the recent price decline,” Rats wrote. After all, prices have fallen despite the fact that OPEC+ has made it clear that production increases are subject to market conditions. Their team is already two months behind schedule. Morgan Stanley sees more historical precedent in 2013 and 1992 to 1993, when soft demand conspired with rising OPEC supplies to weaken market balance without a “recession-like deterioration.” “It’s best to keep an open mind,” Ratz wrote. “Demand indicators are worrying, but it’s too early to have recession-like demand as a base,” he said.
