Financial markets, not demand, crimp crude: MS

OREANDA-NEWS. August 27, 2015. The current weakness in oil prices has more to do with financial markets than crude demand, according to US bank Morgan Stanley.

"While oil fundamentals aren't strong, physical markets do not corroborate the substantial weakness in flat prices," it said in a report today.

China's oil demand remained resilient through July, with crude runs up 595,000 b/d from a year earlier in July, in line with the year-to-date average. Crude oil imports increased to near record levels in July and apparent oil product demand remains resilient. Total apparent demand rose by 573,000 b/d, up 5.9pc, while the apparent demand for transport fuels was better than the year-to-date average.

Mexico's crude hedging program late last week weighed on the market, Morgan Stanley said. The country pegged its 2016 crude hedging program at \\$49/bl, a 35pc decline from this year's \\$76.4/bl. Next year's program will cover only up to 212mn bl, down from 228mn bl in 2015 and 215mn bl in 2014.

"In our view, Mexico's hedging program was an underappreciated negative for prices in recent months, which is now behind us," the bank said. "The end of Pemex hedging program removes a bearish overhang for oil."

The bank said it expects global crude demand to grow by 1.4mn b/d, with refining runs rising by the same volume and helping offset a fall in direct use. Of the total, runs in the industrialized nations will rise by 0.8mn b/d, largely driven by Europe and the Americas. In the non-industrialized nations, refining runs should rise by 0.6mn b/d, driven by Asia and the Middle East.

On the supply front, US output growth will slow as US shale oil output responds quickly to lower prices. Non-Opec supply is expected to grow by 0.9mn b/d in 2015, which is 0.9mn b/d less than the previous year. "US supply is particularly at risk," it said.

Opec output is expected to grow by 0.8mn b/d. "New capacity additions from Iraq and Angola support this growth, as well as additional production from Saudi Arabia," it said.

Crude market fundamentals and prices will remain weak through the second half of this year and next. Demand is near seasonal peak levels and will fall in the second half, while Opec output grows significantly. The dollar index is also strengthening, which weighs down on the price of oil and other commodities.

"As we look to 2016, sanctions could be lifted on Iran, adding 500,000-700,000 b/d," keeping Brent range-bound through the second half of this year and much of 2016, it said.

"That said, prices are likely near the bottom of the range and retesting year-to-date lows is unlikely," it said. "Healthy transport demand, capex cuts, low spare capacity and investor appetite should limit downside."