(Reuters) - Morgan Stanley (NYSE:MS) lowered its long-term Brent price forecast on Tuesday and said the oil market is broadly balanced in 2019 after OPEC and its allies including Russia agreed to extend their production cuts by even longer than expected.
The bank lowered its long-term Brent price forecast to $60 per barrel from $65 per barrel, while it expects prices for the global benchmark to fluctuate around $65 per barrel, from $67.5 per barrel previously, in the next three quarters.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group knows as OPEC+, agreed on Tuesday to extend oil supply cuts until March 2020 as members overcame differences to try to prop up prices.
"OPEC cuts can be very effective when they smooth over relatively temporary imbalances in supply and demand. However, when they become multi-year transfers of market share, history shows that they are usually associated with oil price weakness rather than oil price strength," the investment bank said.
The production cuts, which started as a temporary rebalancing of the oil market, has become a permanent effort of market management highlighting the weakness in the underlying supply/demand fundamentals, the bank said in a note.
Morgan Stanley now expects the de facto leader of OPEC, Saudi Arabia, to continue to produce about 10 million barrels per day or slightly less throughout 2020, overcomplying with its 10.3 million barrels per day quota and said the oil market will be oversupplied by 0.3 million barrels per day in 2020, down from the estimate of 0.7 million barrels per day before.
"Still, in the short term, there are some offsetting factors. Seasonal demand strength will likely result in inventory draws in the U.S. over the next 2-3 months, which creates upside risk," the bank said adding, the International Maritime Organization (IMO) 2020 regulation should boost refinery crude runs in fourth-quarter this year and first-quarter of 2020, again supporting prices.
IMO is introducing the rules on marine fuels would limit the sulfur content to 0.5 percent, down substantially from the current 3.5 percent, to curb shipping pollution.
The bank also said softer U.S. currency and stimulus measures by global central bank on the back drop of economic weakness could drive prices higher.
Oil prices fell more than 4% on Tuesday with Brent crude (LCOc1) futures at $62.40 a barrel, down 4.1% than the previous session. U.S. West Texas Intermediate (WTI) crude (CLc1) futures fell 4.8%, to settle at $56.25 a barrel, after touching their highest in more than five weeks on Monday. [O/R]