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$80 oil is sending market toward demand destruction: Morgan Stanley


Pump jacks at the Belridge Oil Field and hydraulic fracking site which is the fourth largest oil field in California.

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The current energy market picture is looking good for oil bulls. 

International benchmark Brent crude The long-anticipated $80 threshold for barrels was passed on Tuesday. However, the price has fallen to $78.47 in London as of Wednesday 10:30 AM. West Texas Intermediate Around the same time, it was at $74.73 per barrel.  

Demand looks positive with Europe’s gas crisis and winter coming, Some experts warn of the dangers that rising prices could bring about demand destruction. 

The marginal cost of oil has been disconnected. They are instead moving to the point where demand destruction kicks into, which is estimated at $80/bbl. Morgan Stanley stated this in June. Tuesday’s note from the bank said that “This is our thesis.” 

The bank noted, however that it was difficult to determine the exact price at which demand will be destroyed. For now, we leave the price forecast as is, however, it recognizes that there are upside possibilities to our bull-case scenario, which would be $85/bbl, based on current trends. 

Morgan Stanley predicts that global oil supplies will become tighter. They cite an average 3 million barrels/day of inventories draws over the past month, as opposed to the 1.9 million barrels per daily drawn during the previous months. 

Martijn Rats and Amy Sergeant, analysts at the bank, said “These draw are high and indicate the market is less undersupplied that generally perceived.”  

Flights and transport are also improving, Flightradar data for commercial flights showing that the “gap to pre-covid levels” has been closed, they stated. 

But, there are still some concerns. 

The World Bank said Tuesday that the Delta variant is slowing economic growth in the East Asia and Pacific region, and growth forecasts have been downgraded for most of the region’s countries. And China faces a potential slowdown with its Evergrande crisis and a growing power shortage that’s hitting factories, homes and supply chains.  

Stephen Brennock from London’s PVM Oil Associates, said that China’s economic problems are putting a shadow on demand and thus the price outlook. 

Inflation will rise, and higher energy prices could lead to even more inflation. This is an important threat for demand.

Brennock noted in a Tuesday letter that “Rising oil prices were one of major drivers of inflation.” An increase in inflationary pressure will be detrimental to both the fragile economy and oil consumption. The issue of the destruction or excess demand is now clear. 

China and India were two top importers of oil. This month, they began selling oil from strategically held reserves to attempt to decrease crude prices. It hasn’t been able to lower global oil prices but it did send a powerful message.

Brennock said that the main reason for this change in events was price. The price of crude oil has risen to over $70/bbl. This is a major problem for New Delhi and Beijing. Oil prices above $80/bbl could be devastating for them and reduce import demand.