Morgan Stanley's worst case scenario for oil 'turned out to be too optimistic'
The "oil price downturn is now deeper and longer than any of the previous downturns since 1970," according to Morgan Stanley.
Martijn Rats and his team at the investment bank say oil is now in "uncharted territory", in a note sent to clients on Monday.
The bank warned in an August note that the current oil price crisis could eclipse the 1986 slump, but writes in today's note that it looks like it's already worse than that. As a result, there are "no other periods that are useful guides to the future."
Although we recognised this risk, we ultimately expected that an oil price downturn worse than the one of 1986 - by any measure the worst in the last 45 years - would not materialise: spare capacity is currently much thinner, oil demand increased strongly last year, and we expected capex cuts to impact supply at some point.
Still, this has proved to be too optimistic - no floor in oil prices has been found so far. By now, oil prices have fallen deeper and for longer than in any downturns since 1970, including the 1986 cycle.
The price of oil has been plummeting since mid-2014, as OPEC nations led by Saudi Arabia flood the market in a bid to try and drown out US producers.
Morgan Stanley says it doesn't foresee any "meaningful upturn" in the price for at least 6 months. The bank says:
A quick end does not appear to be in sight either: OPEC continues to produce "at will", Iran could increase exports in coming months if sanctions are eased, risk to exports from Libya are skewed to the upside, and the end of the export ban in the US makes elevated inventories in the Lower 48 available globally. Moreover, demand is likely to decelerate given the brittle outlook for economic growth, particularly in emerging markets, and our house view calls for continued dollar strength, which has weighed on oil prices throughout this downturn.
The bank is cutting earnings forecasts for oil and gas companies by between 30% and 70%. Morgan Stanley says dividend cuts are possible "but remain highly unlikely for the Majors." The bank believes capital expenditure across the industry will fall for the second year in a row for the first time since 1987.
Morgan Stanley's bleak prognosis for oil comes as Bank of America Merrill Lynch cuts its target price for oil this year.