- The oil market will soon swing into undersupply, supporting Brent crude above $75 a barrel, Morgan Stanley forecasts.
- The bank is now convinced that OPEC has the determination and capability to further tighten the market with output cuts.
- Morgan Stanley also sees sanctions on Iran tightening after a key deadline to extend import waivers in May.
The investment bank previously said oil prices were more likely to fall after Brent crude topped $65 a barrel last month. But Morgan Stanley now sees the international benchmark for oil prices rising to $75 by the third quarter.
Analysts at Morgan Stanley say they changed their minds after last week's CERAWeek by IHS Markit energy conference in Houston. They are now more convinced that OPEC has the determination and capability to drain oversupply from the oil market.
"Conversations with several OPEC officials left us with the impression that Brent in the mid-$60s is not where the cartel would like to see it," Morgan Stanley global oil strategists Martijn Rats and Amy Sergeant said in a research note Tuesday.
"We assume that OPEC will extend – or even deepen – production cuts to support the oil market at the next meeting in June."
OPEC and its partners aim to keep 1.2 million barrels per day off the market. On Monday, the alliance canceled an April meeting intended to review the supply deal, leaving the output cuts in place until the June gathering. Members of the pact believe the market will remain oversupplied through the first half of the year, making the April meeting unnecessary.
Morgan Stanley also believes output disruptions from Venezuela will accelerate following this month's power outages there and U.S. sanctions on state oil giant PDVSA. The bank cited estimates from oilfield services firm Schlumberger at CERAWeek that Venezuela's production might have plunged to roughly 600,000-700,000 barrels per day this month.
Comments at CERAWeek from Secretary of State Mike Pompeo and U.S. special representative for Iran, Brian Hook, also indicate that the U.S. will allow fewer Iranian barrels to hit the market, Morgan Stanley says. The Trump administration allowed eight countries to continue importing some Iranian oil when the U.S. restored sanctions on the Islamic Republic in November.
Morgan Stanley expects the administration to roll over waivers for China, India and Turkey in May and tighten exemptions for Japan and South Korea. It forecasts the U.S. will allow 900,000 to 1 million barrels per day of Iranian exports under the waivers, compared with about 1.2 million bpd in November.
On the demand side, Morgan Stanley says fears that oil consumption would slow sharply this year now appear to be overblown. That view also underpins Goldman Sachs' view that Brent will top $70 a barrel.
Those dynamics will soon push the oil market into deficit, Morgan Stanley projects. The bank sees the market undersupplied by 500,000 bpd in the second quarter, with the deficit expanding to 800,000 bpd in the third quarter. That will support Brent crude at $75 a barrel in the third quarter.
Watch: CNBC's exclusive CERAWeek interview with Mike Pompeo and Rick Perry