Bloomberg News

Morgan Stanley Sees ‘Selling Opportunity’ Should Oil Surge

January 09, 2012

(Updates with analyst comment in fourth paragraph.)

Jan. 9 (Bloomberg) -- A surge in oil prices because of a supply disruption in the Middle East would represent a “selling opportunity” as deteriorating fundamentals will counter the short-term gains, said Morgan Stanley.

Refinery demand for crude has slowed and the underlying trend “remains poor,” according to a report today by Hussein Allidina, head of commodities research at Morgan Stanley in New York. Loss of supply because of a closing of the Strait of Hormuz would probably be countered by releases from global strategic petroleum reserves, the report showed.

Crude futures in New York have jumped 7.8 percent in the past three weeks amid Iranian threats to close the strait, a transit route for a fifth of the world’s oil, in response to sanctions. Iran has the ability to block the strait “for a period of time” and the U.S. would act to reopen it, Joint Chiefs of Staff chairman General Martin Dempsey told the CBS “Face the Nation” program yesterday.

“If tension in the Mideast recedes, the premium that has been built into crude prices is likely to fade,” Allidina said in the report. “The U.S. could likely reopen the Strait of Hormuz within weeks to a month following an Iranian blockade. This timeframe is short enough that a large coordinated release from the SPR and rerouting options could limit the impact on global markets.”

Slowing Demand

Morgan Stanley maintained its forecast for Brent crude to average $100 a barrel in 2012. Prices averaged $110.91 last year and were at $113.12 today.

The U.S. tightened economic sanctions against Iran over its nuclear program on Dec. 31 and the European Union is weighing a ban later this month on purchases of Iranian crude.

Global crude demand is slowing with the U.S. reporting a drop of 1.7 million barrels a day from a year ago and South Korea and Japan showing negative growth, said Morgan Stanley. Inventories, particularly for middle distillate supplies such as heating oil and diesel, have expanded amid a relatively warm start to the northern hemisphere winter, the report showed.

“We expect to see more bearish inventory trends in the coming months as seasonal demand weakness and slowing economic growth coalesce with increased supply,” Allidina said in the note.

--Editors: Paul Gordon, Mike Anderson

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net


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