Morgan Stanley has downgraded its outlook for oil prices, expecting low prices to persist for longer than previously thought as the supply and demand imbalance looks set to continue for at least another two years.
The bank lowered its average 2016 Brent price forecast to US$30 per barrel, down from US$49 previously. Morgan Stanley now expects an average price of US$40 per barrel in 2017 as oversupply persists, before climbing past US$50 by the end the year to average US$70 by 2018.
"To rebalance the market, we maintain that demand must 'catch up' to supply, as production is unlikely to retrench materially.
The challenge is that demand growth is slowing. When combined with seasonality and lagged data, confirmation of large draws and rebalancing now may not be apparent until mid-2017 in our base case," said analysts led by Andrew Sheets at the group.
Sheets said any recovery will need to be a "three step" process, where an oversupplied market needs to rebalance by cutting production and increasing demand, working off high oil inventories and allowing producer hedging to run its course.
Oil extended a rally above US$35 a barrel on Thursday, adding to the previous session's 7 per cent jump, as support from a weaker dollar offset concern about over supply and record-high US inventories.
Crude bounced from an earlier decline after comments from an Iranian official suggesting Tehran supported a meeting between the oil-producing cartel OPEC and other producers raised hopes -- despite much skepticism in the market -- that they could take action to support prices.
Brent crude was up 62 cents at US$35.68 a barrel in afternoon trading Thursday.
Prices have gained over 30 per cent since falling to US$27.10, the lowest since November 2003, on January 20th. US crude was up $1.11 cents to US$33.41.
Looking at the impact low oil prices will have on other asset classes, Morgan Stanley expects further weakness in the oil producer currencies, specifically the Canadian dollar and the Norwegian crown.
Exporters of other commodities should generally move in line, including the Australian and New Zealand dollars.
With Brent averaging US$30 in 2016, Russia will have to choose between the depletion of their sovereign wealth oil fund, or a 3-3.5 per cent contraction in the economy this year, analysts at the bank said.