Morgan Stanley: Any Oil Relief Will Be 'Short Lived,' Gas Still Challenged

Adam Longson of Morgan Stanley commented in a note on Monday that gas headwinds will persist through the year-end, creating an uptick in the risk-reward profile in 2015. According to Longson, January 15 Henry Hub has fallen approximately 23 percent from late November highs as supply growth and a milder weather returned working gas storage to a year-over-year surplus.

“Based on weather-driven models, the year over year surplus should grow to 150 plus Bcf by end-December, which adds to near-term downside risk,” Longson wrote. “That said, plenty of bad news is priced in, and with managed money net positioning near two-year lows, the potential for cold weather (which early January forecasts view as more likely) to produce upside swings and volatility also increases.”

Longson adds that if oil is going to rally, it needs to occur soon. The analyst wouldn't be surprised if he sees increased “value buying” in the form of out of the money call options over the next two months. Nevertheless, any oil relief rally will likely be “limited and short-lived, barring a major outage.”

To support this view, Longson notes that OPEC has already reaffirmed it will not cut output through the first half of 2015. Also, the physical market indicators appear to be weak and inventory overhangs “need to be cleared.” Additionally, more supply will enter the market in early 2015 from Brazil, U.S. shale, Gulf of Mexico, Canada, Iraq and Russia.