Oil prices are going to $90 per barrel in the 2nd half of this year on the back of a 'triple deficit' for the commodity, Morgan Stanley says

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Oil prices are going to $90 per barrel in the 2nd half of this year on the back of a 'triple deficit' for the commodity, Morgan Stanley says
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  • Oil prices will continue to rise in the second half of 2022 on the back of a "triple deficit," Morgan Stanley said.
  • The bank sees the price of Brent crude oil hitting $90 per barrel by the second half of this year.
  • Brent crude hovered near two-month highs Wednesday, trading at $84.96 per barrel.

Oil prices will continue to rise in the second half of the year on the back of a "triple deficit" — low inventories, low spare capacity, and low investment — that is pushing the cost of the commodity higher, according to Morgan Stanley.

The investment bank sees the price of Brent crude oil hitting $90 per barrel by the second half of 2022, according to a recent note by its commodities strategist and head of European oils, Martijn Rats. Morgan Stanley said it assumes an average Brent price of $78 per barrel in 2022.

Brent crude, oil's international benchmark, was hovering near a two-month high around at $84.96 per barrel on Wednesday. West Texas Intermediate crude also jumped, trading at $82.84 per barrel. Prices pulled back some on Thursday, eating into gains in the previous two sessions.

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"In the short term, the balance in the oil market is a function of the pace at which demand recovers from the COVID-19 pandemic, and supply grows as OPEC normalizes its production cuts," Rats said in the note. "That balance can still swing around, but once these trends have played out, the oil market appears to be heading for a "triple deficit."

The forecast comes as the emergence of the Omicron coronavirus variant rocked the prices of global commodities and equities. Oil prices in particular have rallied 50% in 2021.

As a result, the Organization of the Petroleum Exporting Countries and its allies, also known as OPEC+, said it will gradually relax the output cuts it had implemented when demand slumped in 2020 while large swathes of the global economy were in lockdown. Still, producers of OPEC+ continue to hold back more than 3 million barrels of output per day.

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Other risks that may challenge this outlook are Iranian oil exports constrained by US sanctions, the pace at which US shale ramps up, and the impact of the pandemic and hybrid working, Morgan Stanley added.

On Tuesday, the US Energy Information Administration upgraded its oil demand outlook. The agency is now predicting that demand in the country will rise by 840,000 barrels per day in 2022, higher than its previous 700,000 forecast.

The International Energy Agency on Wednesday also said it expects oil demand to continue to be strong.

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"Demand dynamics are stronger than many of the market observers had thought, mainly due to the milder Omicron expectations," IEA Executive Director Fatih Birol said on a call, Bloomberg reported.

This could mean that the IEA will upwardly revise its demand forecast when it publishes its monthly report next week, according to Commerzbank strategists Daniel Briesemann and Carsten Fritsch.

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