Crude oil to rally to US$130: Morgan Stanley

Morgan Stanley is bullish on oil, with the belief that US$130 could be on the cards for Brent crude.

"We see further inventory draws ahead as the year progresses, and with spare capacity eroding and still only a modest capex response, we suspect that Brent prices will need to move higher," said the investment bank in a note on Wednesday.

Surprisingly, The US Energy Information Administration (EIA) posted an unexpected 8.5m barrel build in stockpiles.

A tale of two stories

Upside risks

• Weak OPEC production

  • Crude oil production by OPEC and its partners hit a six month low of 41.58m barrels a day in April as Russian production took a hit from Western sanctions, according to S&P Global Platts

  • 13 out of 19 OPEC+ countries struggled to hit their output targets

• EU oil sanctions

  • The EU is trying to get all 27 nations to agree to phase our Russian oil imports

  • The bloc is so far struggling to convince Russia-dependent countries like Hungary and Slovakia to agree to the embargo

Downside risks

• Economic growth

  • Goldman Sachs downgraded US GDP growth from 3.1% to 2.9% for 2022. Analysts said there are additional downside risks if shortages of key metals constrain production

  • US March quarter GDP unexpected declined -1.4% compared to expectations of a 1.0% gain

  • Fitch Ratings cut its forecast for China's 2022 GDP growth to 4.3% from 4.8% on Wednesday

• China lockdowns

  • Shanghai health authorities said on Wednesday that transmission risk has effectively been curbed

  • Authorities said they should stick to preventive and control measures as any relaxation could cause a rebound in cases

• Demand destruction

  • If oil were to hit US$130 - what would be the most logical thing to happen? It could take a hit on consumption, keep inflation high and trigger more tightening from central banks

Oil coil

For the past two months, oil has mostly traded around the mid US$100 level, ignoring the interest rate, economy and equity market hysteria.

Since the massive run up in early March, oil's price action has become increasingly less volatile. Its finding plenty of support when it breaches US$100 but struggling for any upside over US$110.

Such tight price action generally alludes to a significant break. Given current circumstances, it looks like a break towards both the up and downside is possible.

WTI Crude Oil (Source: TradingView)

While Morgan Stanley envisions upside for oil, its also worth considering the downside risks.