Morgan Stanley latest to cut oil demand growth forecast on China factors

Crude oil futures settled higher on Friday but fell for the week, as the market digested bullish U.S. inventory data and Fed Chair Jerome Powell sent his strongest signal yet that the central bank will cut interest rates next month.

Earlier this week, oil futures hit their lowest since early January after the U.S. government sharply lowered its estimate of jobs employers added this year through March, raising fears of a possible recession, outweighing support from a big drawdown in U.S. crude stockpiles.

But with the upside risks to inflation diminishing and the downside risks to employment increasing, “the time has come for policy to adjust,” Powell told the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming, on Friday.

For crude oil, “the real question will be the pace and scale of additional cuts in the months that follow, [which] should have a significant influence on dollar-denominated commodity prices like crude, where rate cuts are typically supportive of nominal prices,” Schneider Electric’s Robbie Fraser told Dow Jones.

Friday’s crude oil gains fall short of averting a weekly loss, as front-month Nymex crude (CL1:COM) for October delivery finished +2.5% to $74.83/bbl and front-month October Brent crude (CO1:COM) settled +2.3% to $79.02/bbl, but the benchmarks were off 0.9% and 0.8% for the week, respectively.

U.S. natural gas futures fell for a fourth straight session on oversupply concerns but managed to hold above the $2 level, as front-month September Nymex gas (NG1:COM) finished -1.5% on Friday at $2.022/MMBtu, down 4.7% on the week.

ETFs: (NYSEARCA:USO), (BNO), (UCO), (SCO), (USL), (DBO), (DRIP), (GUSH), (USOI), (UNG), (BOIL), (KOLD), (UNL), (FCG)

Morgan Stanley analysts were the latest to point to weakness in China in lowering their global oil demand growth forecast for 2024, mainly due to China’s slower economic growth and increased electric vehicle usage in the country.

The bank now sees global oil demand rising this year to 1.1M bbl/day from its prior outlook for 1.2M bbl/day, and it trimmed its Brent price forecast modestly to average $80/bbl Q4 2024 compared to $85/bbl previously.

Gasoline displacement by EVs in China has reduced the country’s oil demand growth by 100K bbl/day, and a rise in the number of trucks in China powered by liquefied natural gas has cut oil demand growth by 100K-150K bbl/day, Morgan Stanley analysts said.

Energy (NYSEARCA:XLE), as represented by the Energy Select Sector SPDR Fund ETF, ended the week -0.1%, the only one of the S&P’s 11 industry groups to finish in the red.

Top 10 gainers in energy and natural resources in the past 5 days: Perma-Pipe International (PPIH) +35%, Piedmont Lithium (PLL) +23.7%, Eos Energy Enterprises (EOSE) +22.3%, ASP Isotopes (ASPI) +21.8%, Calumet Specialty Products (CLMT) +17.9%, Nano Nuclear Energy (NNE) +17.2%, Largo (LGO) +16.9%, Atlas Lithium (ATLX) +15.2%, Caledonia Mining (CMCL) +14.4%.

Top 5 decliners in energy and natural resources in the past 5 days: Zeo Energy (ZEO) -15.8%, Tamboran Resources (TBN) -14.4%, Gold Fields (GFI) -13.2%, Hawaiian Electric (HE) -12.9%, Gran Tierra Energy (GTE) -10.9%.

Source: Barchart.com