Morgan Stanley Remain Upbeat on Oil Prices, Recovery May Take More Time

In a note, Morgan Stanley analyst Adam Longson makes the case that near term crude oil fundamentals are not as bad as suggested. He feels crude fundamentals appear more upbeat over the next few months than IEA product balances suggest. He also offered offers insights into the near-term outlook, based on their crude oil balance, and provide a preview of 2015. Key highlights include: 1) Current imbalances are overstated: From a true crude oil S&D perspective, OPEC does not need to cut production before March. 2) The 2015 outlook is less dire than suggested. OPEC at ~29.8 mmb/d should be sufficient to balance the market. 3) Lower prices today add to upside risk as soon as 2015. There is a scenario where OPEC cuts could combine with outages and a price response to create a tight balance in 2015. 4) A crude oil balance and refinery runs explain much of the price action this year. These dynamics were not clear in the IEA product balance. 5) Crude demand is better than headline IEA balances suggest. Crude and product demand have diverged for years, and crude's underperformance is now reversing. Product weakness is occurring in less important produts January oil futures, after trading below 64 overnight, have rebounded and are now back to nearly unchanged, trading down marginally at 66.05.