Oil will surge to $120 and stay high for more than a year as Russian supply dwindles, Morgan Stanley’s commodities chief says

Oil is set to surge to $120 a barrel as the Ukraine conflict rocks energy markets, Morgan Stanley’s chief commodities strategist has predicted. Crude oil prices will then stay around the $100 mark for the whole of 2023, Martijn Rats told Insider. The war in Eastern Europe will mean Russian oil production will fall by around 1 million barrels per day, as the country struggles to find buyers for its energy.

Although European governments have not followed the US in banning Russian energy imports, many companies in the region are “self-sanctioning” and shunning them, Rats noted. The oil market was tight, is tight, and is getting tighter,” he said. “A 12-to-18 month period ahead with elevated prices is quite likely.”

Russia-Ukraine pressure
Crude oil prices have surged as a result of Ukraine’s invasion by Russia, which is an important global energy supplier. Brent crude, the international benchmark oil price, shot to a 14-year high of $139 a barrel earlier in March, having started the year at around $79. Prices then cooled sharply, in light of reports that Russia and Ukraine were thrashing out a peace agreement. Brent stood at around $106 a barrel as of around 11 a.m. ET Friday, while WTI crude traded at around $103 a barrel.

Governments and investors worry that rising oil prices could put more upward pressure on inflation, which is already running at multidecade highs in the US and Europe. Rats’ baseline prediction is that Brent crude will consistently trade at $120 a barrel by the third quarter of 2022, as the lower levels of Russian supply make themselves felt. The strategist said oil would likely fall to around $100 a barrel in the fourth quarter, and stay around that level for the whole of 2023. “I would categorize that as a high price,” he said.

Oil scenarios
However, Rats said forecasting in the current climate is hugely difficult. “There’s certainly scenarios imaginable where oil prices go higher than what we’re forecasting,” Rats said.

A move by the EU to ban the import of Russian oil and gas would further tighten supply, and push up prices, he predicted. A failure by Western governments to reach a nuclear deal with Iran, which would reconnect the country with global energy markets, would also drive prices higher.

The International Energy Agency has gone further than Morgan Stanley in estimating oil markets could lose 3 million barrels a day from April as a result of the Ukraine conflict. The world consumes around 100 million barrels a day, according to IEA estimates.

The IEA warned Friday that oil markets are in an “emergency situation”, and it urged Western countries to cut back on their energy consumption by limiting air travel and restricting driving. Equity investors have been watching oil markets closely as they try to predict inflation and gauge central bank policy.

Stocks fell sharply when oil surged earlier in March. But they have posted solid gains over the last week after energy prices cooled, although other factors have also been driving markets. The S&P 500 was on track for a weekly gain of around 5% as of Friday afternoon ET.

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