February 12, 2018 / 11:58 AM / 9 months ago

Morgan Stanley sees oil price risk skewed to upside

A pumpjack is seen at sunset outside Scheibenhard, near Strasbourg, France, October 6, 2017. REUTERS/Christian Hartmann

(Reuters) - Morgan Stanley said it expects oil price risks to be skewed upwards in the months ahead despite a loss in momentum over the past couple of weeks as the market remains in deficit, which could keep the forward curve in backwardation.

The investment bank, which kept its oil price forecasts unchanged, said all main crude forward curves continued to show a healthy level of backwardation.

Last month, the bank raised its Brent price forecast to $75 per barrel for the third quarter of 2018.

“The key attraction of oil futures in recent months has been its backwardated structure, which is providing an attractive level of roll yield of 6-7 percent annualised,” Morgan Stanley analysts wrote in a note on Monday.

“This has supported prices along the forward curve in recent months.”

Backwardation, when the front-month contract is more expensive than subsequent months, makes it uneconomical to store crude, resulting in the drawdown of inventories. It is usually seen as a sign that the market is rebalancing and that prices are likely to head higher in future months.

“Despite sharp sell-offs through financial markets, the backwardation in the Brent, WTI and Dubai curves is broadly unchanged over the last few weeks,” the analysts wrote.

“The fact that the curve has stayed backwardated is a positive sign about the health of the physical market.”

Oil rose 2 percent on Monday, recovering some of last week’s steep losses as global equities steadied after their largest one-week slide in two years.

Reporting by Koustav Samanta and Swati Verma in Bengaluru; Editing by Dale Hudson

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