Morgan Stanley Oil crash prediction

27 July,, Lagos – Following the renewed bearish pressure on oil, Morgan Stanley has given a prognosis, stating that the recent oil crash could be worst in at least 45 years.

So far since June, Crude oil resumed its downward spiral, as a new glut hit the market. Production output from Saudi Arabia and Iraq surged to record levels, U.S. production remains near the highest level in four decades and Iran is about to reenter the markets after reaching a nuclear deal with world powers. Iran has been barred from exporting oil for years, keeping the world’s second-largest exporter among the Organization of Petroleum Exporting Countries as of 2012, away from the markets for years.

Crude oil

With West Texas Intermediate trading around 47.91 at the moment, this shows a fall of 22 per cent since June 10, resulting in a dip of over US$100 billion in market value, based on companies in the Bloomberg Intelligence North America Independent Explorers and Producers Index.

The tactic of OPEC, masterminded by Saudi Arabia may just be working, as U.S shale producers feel the pressure of the glut and crash in prices. “The commodity price is telling the U.S. shale sector to shrink,” said Subash Chandra, an oil analyst at Guggenheim Securities LLC in New York. “Barrels from the U.S. are on a collision course with barrels coming out of Iran, Saudi Arabia and elsewhere.” The new bearish run has therefore resulted in renewed fear amongst shale patch and the bankers of the shale patch.

In the aftermath of the fall in prices, U.S. shale drillers have had to slash spending and cut workers this year as prices fell. Most companies in the index spend money faster than they earn it, making up the difference with debt, according to data compiled by Bloomberg.

According to Morgan Stanley’s Oil prediction, the bank analyzed stated that “We have been expecting the current downturn to be as severe as the one in 1986… but not worse than that,”. But with oil ending the week much lower again, Morgan Stanley believes a worst case scenario may just be setting up. The bank admitted to underestimating OPEC’s high production this year. This high production is the major reason why the re-balancing of oil markets has not gained momentum, “and means the oil crash could turn out to be worse than 1986; if so, it would be the worst in at least 45 years” according to the bank.

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