After last week’s steep sell-off, oil prices suggest traders are pricing in a demand slowdown that is similar to a mild recession, according to a Morgan Stanley analysis. To be clear, Morgan Stanley’s economists anticipate a “soft landing” for the U.S. economy, saying it will exit 2024 “on fundamentally sound footing.” But there are some troubling signals in the oil market and a recession-like scenario “is not entirely to be dismissed,” Martijn Rats, commodity strategist at Morgan Stanley, told clients in a Monday note. Crude oil futures have declined precipitously in September, with Brent and U.S. crude oil on Friday posting their worst weeks since October 2023. Brent and U.S. crude are both down more than 15% for the quarter. The global benchmark was trading below $72 per barrel on Monday, while the U.S. benchmark was hovering under $69 per barrel. Morgan Stanley was expecting Brent to pull back from the mid-$80 per barrel range as summer seasonal demand fades and OPEC supplies are expected to increase in the fourth quarter. “That said, the decline in prices has been both quicker and sharper than we expected,” Rats told clients. Morgan Stanley is forecasting a surplus of about 1 million barrels per day in 2025. The investment bank has cut its Brent forecast to $75 from $80 previously for the fourth quarter, with the global benchmark remaining at that level through 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 fits are Dec. 19, 2019, through March 2020 and June to September 2009, the start of the Covid-19 pandemic and the financial crisis, respectively. “Naturally, that paints a weak picture,” Rats said. “If the fit with these periods continues, further downside might be ahead.” While the price trajectory might be similar, the current demand outlook is nowhere close to the 20 million barrel per day collapse witnessed in early 2020 or the contraction of 3 million barrels per day in mid-2008, the analyst said. @LCO.1 @CL.1 3M mountain Brent v. WTI “Still, the comparisons above suggests the oil market is discounting a substantial deterioration in supply/demand conditions,” Rats said, either through recession-like demand weakness, or the combination of soft demand with increasing supplies from OPEC. The difference between the first-month and twelfth-month Brent contract is suggesting crude oil inventories in developed economies will increase by 150 million barrels, according to the investment bank. Over the past five U.S. recessions, these stockpiles built by 150 million to 220 million barrels. “This implies a demand slowdown similar to a mild recession,” Rats wrote. This crude inventory increase in developed economies would imply a 375 million barrel stockpile build worldwide, or 1 million barrels per day across an entire year, according to Morgan Stanley. Supply It may be that increasing supplies, rather than slowing demand due to a recession, are responsible for the inventory build that crude oil futures are signaling, according to the investment bank. OPEC+ is planning to increase production starting in December, and output in the U.S., Canada, Brazil and Guyana is robust. “Although rising OPEC output is a key factor behind the surplus we model for 2025, we would be hesitant to argue that this justifies the recent price decline,” Rats wrote. After all, prices have fallen despite the fact that OPEC+ has made clear the production increases are subject to market conditions. The group has already delayed them by two months. Morgan Stanley sees more historical precedent in 2013 and 1992 to 1993, when soft demand conspired with rising OPEC supplies to weaken the market balance without “recession-like deterioration.” “It’s best to keep an open mind,” Rats wrote. “Demand indicators are concerning but it remains too early to make ‘recession-like’ demand the base case,” he said.
