Morgan Stanley sees ‘more problems’ for oil market on new supply

1/5/2015

Morgan Stanley sees ‘more problems’ for oil market on new supply

SHARON CHO

NEW YORK (Bloomberg) -- The oil market is set for “more problems” this year as increasing supplies from countries including Russia and Iraq add to the global glut that drove prices almost 50% lower in 2014, according to Morgan Stanley.

Output may increase from fields in West Africa, Latin America, the U.S. and Canada in addition to more exports from Russia and Iraq, offsetting concerns of reduced production in Libya, analysts including New York-based Adam Longson said in an emailed report. Iran may raise overseas shipments by about 500,000 bopd if western sanctions against the country are lifted, according to the report.

Morgan Stanley is predicting additional supplies coming to the market as the Organization of Petroleum Exporting Countries maintains its production quotas and the U.S. pumps at the fastest rate in more than three decades. Benchmark prices are extending declines in a bear market as OPEC pumped above target for a seventh straight month in December.

“With the global oil market just passing peak runs and Libyan supply already at low levels, it’s hard to see much improvement in oil fundamentals near term,” Morgan Stanley said in the report. “A number of worrying signs have already emerged, lifting the probability of our bear case.”

Oil exports from Iraq were at 2.94 MMbpd in December, the most since the 1980s, according to Asim Jihad, a spokesman at the nation’s oil ministry. OPEC’s second-biggest producer plans to ship 3.3 MMbopd this month, Jihad said on Jan. 4.

Iraqi Exports

Iraq reached an agreement with its semi-autonomous Kurdish region last month over oil exports through Turkey, after years of disagreement on the territory’s right to independently develop its energy resources. The pact allows as much as 550,000 bopd from northern Iraq to be shipped to the Mediterranean port of Ceyhan, along a pipeline to the Turkish border operated by the Kurdistan Regional Government.

In Russia, the biggest crude producer, oil output rose 0.3% in December to a post-Soviet record of 10.667 MMbpd, according to preliminary data emailed by CDU- TEK, part of the Energy Ministry. Iraq and Russia provided 15% of the world’s oil in November, according to the International Energy Agency.

The supplies from Russia and Iraq will help offset reduced output in Libya, according to Morgan Stanley. Libyan production has fallen below 300,000 bopd, the lowest since May, after militants shifted attacks to energy facilities including the country’s largest oil export terminal, according to Energy Aspects Ltd. estimates. That’s down 65% from a recent high of 850,000 bopd in October.

Iranian Agreement

A potential deal between Iran and the U.S. could “open the door to a lifting of oil sanctions” and boost exports from the OPEC member, Morgan Stanley said. Iran and the U.S. have tentatively agreed that the Middle East nation will ship to Russia much of the material it could use to make nuclear weapons, the Associated Press reported, citing two unidentified diplomats.

In Africa, new reports of unsold West African and North African cargoes are emerging with much of the crude moving into storage, according to Morgan Stanley.

“With demand likely to fall seasonally and supply continuing to ramp, the inventory overhang should only grow over the coming months,” the bank said. “These excess inventories will need to be cleared before the market can heal, likely putting a cap on any upside.”

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