While problems with Iran, an economic collapse in Venezuela and supply cuts led by the Organization of the Petroleum Exporting Counties (OPEC) and Russia have helped drive a rise in oil prices to their highest level in at least four years, one team of analysts sees another issue as serving as key support for oil prices over the next two years. (See also: Oil Could Hit $80 by End of 2018: Natixis.)
As Brent crude oil, the international benchmark, rises above $80 for the first time since 2014, Morgan Stanley analysts are forecasting it to reach $90 a barrel in 2020 as demand for diesel and jet fuel booms on new shipping regulations. The changes enforced by the International Maritime Organization will force vessels to either install equipment to scrub pollutants from engines or consume cleaner, low-sulfur fuels beginning in January 2020. Analyst see it as more likely for shippers to choose the latter, heightening demand for middle distillate products like diesel and marine gasoil, which should trigger a need for more crude. Meanwhile, a majority of the growth in global oil production an be attributed to natural gas liquids and condensates, which both are useless in making middle distillates.
New Shipping Regulations to Lift Crude Prices
“Over the next few years, we expect tightness in one particular product—middle distillate—to lead to strength in one particular liquid, crude oil, and especially those crudes that look like Brent,” said Martijn Rats, Morgan Stanley’s global oil strategist, in a research note Tuesday.
The investment bank previously forecast that Brent would average $65 in each of the four quarters of 2020. As stockpiles of middle distillates near five-year lows, and demand for fuel booms, refineries are finding it difficult to keep up with higher-than-expected consumption. Morgan Stanley expects demand to grow by another 1.5 million barrels a day due to the tighter pollution rules in the shipping industry. According to the analysts’ estimates, global crude oil output would need to grow by 5.7 million barrels a day by 2020 to meet the surge in demand for distillates. Morgan Stanley doubts this is possible.
“We see global crude production re-accelerating again, but falling well short of this level. Since 1984, crude oil production growth over a 3-year period has reached this level only once,” wrote Rats. (See also: Top 3 Small-Cap Oil Stocks for 2018.)