Material Matters: Oil’s Uncertain Path

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A glance through the latest expert views and predictions about commodities: After the recent oil price rally, brokers weigh the competing forces of geopolitical turmoil against negative oil market fundamentals.

-Updated oil price forecasts post disruption fears
-OPEC-Plus capacity and weak demand weigh
-Favoured ASX-listed oil exposures

By Mark Woodruff

There is a broad range of potential outcomes for the oil market in the weeks and months ahead, making forecasting a challenge for commodity analysts as weak underlying market fundamentals are counterbalanced by the unpredictable but highly inflammable geopolitical landscape.

Prior to last night’s pullback, oil prices had increased by around 10% in the past three weeks to be trading at around US$74/bbl (Brent) in anticipation of potential Israeli military action against Iran.

While there are market concerns around potential supply disruption arising from events in the Middle East, the OPEC-Plus alliance of 23 countries has spare capacity, which means it can compensate for sizeable supply losses, explains Morgan Stanley.

Further, the broker points out oil demand has continued to come in lower-than-expected in recent weeks mostly driven by weakness in China, and, to a lesser extent, India, the Middle East, Japan, and Korea.

Analysts at Jarden also highlight rising market concerns about the global economic growth outlook (particularly via China), while sentiment has taken a hit from recent media reports suggesting Saudi Arabia is threatening to increase output.

This broker maintains its US$80/bbl near-term oil price forecast despite material upside and downside risks from the rising tensions in the Middle East. Upside should a supply disruption occur and downside if no disruption eventuates, explain the analysts.

Jarden’s Brent oil price forecasts for 2025 and 2026 are also kept at US$80/bbl.

Over at Goldman Sachs, the near-term price forecast falls to US$70-85/bbl from US$75-90/bbl though a temporary peak at US$90/bbl is considered possible in the event of disruptions to Iranian supply.

Regarding LNG, Goldman continues to expect an upcoming wave of supply growth will soften prices from 2025/26.

The broker’s commodities team also raises its Japan Korea Marker (JKM) forecasts (the key LNG benchmark for Northeast Asia) by 18% and 15%, respectively, for the second half of 2024 and 2025 to US$13.5/mmbtu and US$12.2/mmbtu.

While Citi maintains its crude oil price forecast for the fourth quarter of 2024 and the first quarter of 2025 at US$74/bbl and US$65/bbl, respectively, this broker’s bull case scenario for both periods rises to US$120/bbl from US$80/bbl.

Concerns range from an attack on a refinery leading to disrupted crude oil and liquids supply, to losing most of Iran’s crude oil exports, and a range of negative impacts on oil flows through the Strait of Hormuz, though Citi analysts consider the latter unlikely.

Highlighting forecasting difficulties, Citi assigns a 20% (up from 10%) probability the bull case scenario occurs, but also applies a 20% likelihood to a bear case with the oil price potentially dropping to US$60/bbl.

Current supply-demand fundamentals show supply growth could exceed demand growth for multiple years, highlights the broker.

Overall, Morgan Stanley believes geopolitics will continue to support prices in the coming weeks or months.

This view is reflected in the broker’s fourth quarter 2024 Brent oil forecast which increases to US$80/bbl from US$75/bbl.

And in the case of no actual supply disruption? At some point the analysts expect a temporary period of lower prices might be required to resolve the issue of Morgan Stanley’s 2025 forecast surplus of 1.3mb per day.

As a result of this surplus beckoning, this broker predicts Brent oil will end 2025 at US$70/bbl, down from the prior estimate for US$75/bbl.

Preferred oil exposures

From among stocks under coverage by Morgan Stanley, Overweight-rated Santos ((STO)) is the preferred exposure while Beach Energy ((BPT)) is least desired with an Underweight rating.Citi, on the other hand, has a Neutral rating for Santos and Sell ratings for both Beach Energy and Woodside Energy ((WDS)).

A dividend cut appears necessary at Woodside, stated Macquarie last week, due to a near doubling of LNG portfolio scale by 2031-32.

The analyst is concerned gearing is set to rise to the top end of management’s range in 2025, at a point when oil supply/demand balances are fundamentally loosening. Macquarie’s target for Woodside was lowered by -18% to $27 and the rating downgraded to Neutral from Outperform.

While the company is investing to reposition for the long-term, the broker suggested a prolonged heavy capex commitment will likely limit any share price re-rating for now. 

Garnering widespread approval, Karoon Energy ((KAR)) has Buy ratings from Citi, Jarden and Goldman. While Morgan Stanley has an Equal-weight rating, four other brokers (including Citi) have Buy (or equivalent) ratings in the FNArena database.

Goldman also likes Buy-rated Strike Energy ((STX)) and the refiners Ampol ((ALD)) and Viva Energy ((VEA)) despite lowering gasoline and diesel crack spread estimates by -12% and -18%, respectively, to US$11/bbl and US$16/bbl.

Lower spread forecasts are due to falling Singapore light and middle distillate cracks against Dubai over the September quarter primarily on weak demand in China.

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