Morgan Stanley Wants Higher Oil Prices as JPMorgan Insists $70/bbl is the Appropriate Limit

Monday April 16, 2018

Usually in the aftermath of any market fear that proves to be a bust, experts look to the longer term for fresh worries, and Morgan Stanley did exactly that on Monday in the wake of the U.S. missile strikes against Syria being pulled off with far greater success and precision than critics had expected. 

Andrew Sheets, chief cross asset strategist at Morgan Stanley, told Bloomberg television that currently the market is in the midst of a season that tends to support prices in addition to geopolitical tension; but he believes in the longer term the demand for crude will decline due to the rise of alternative energy, and "the supply of oil is also probably going to be declining, because companies have cut back enormously on their capital expenditures, and oil is increasingly difficult and expensive to find."

Therefore, he added, "in Morgan Stanley's view, the clearing price for oil needs to be higher than where it is today, to encourage that investment, even with those important alternative energy sources."

But as is the case with any sweeping statement about where oil should be, there are contrarians, and David Kelly, chief global strategist at JPMorgan Asset Management, bucked conventional wisdom by telling Bloomberg that $70 "is at the top of the range we're going to see over the next few years; yes, we've got these geopolitical issues, but I don't know if sanctions [against Iran] would be that effective....and frankly, the more you push up oil prices, the more incentive there is for countries like China to import the oil we're not going to import."

Kelly went on to say that $70 as a price ceiling "doesn't hurt U.S. consumers too much; it's a price that is actually helping out the stock market, helping out U.S. energy companies."

He added that he is not "calling for sustained prices much higher than this....I'd rather play it the other way and say that the U.S. economy can take this; but if you think that higher oil prices are going to push up rates, push up inflation in the U.S. and we're going to sustain this, then I think you still go with cyclicals, companies that can benefit from higher interest rates, because I think that will be the ultimate result of oil prices staying where they are." 

Still, a perceived lack of industry investment is what experts focused on the long term fear the most, and the latest noteworthy figure to sound the call for higher prices that would achieve that end was Amin Nasser, chief executive officer for Saudi Aramco.

Last month he said that $20 trillion in investment is required, and that investments "will only come if investors are convinced that oil will be allowed to compete on a level playing field, that oil is worth so much more, and that oil is here for the foreseeable future.....that is why we have to push back on the idea that the world can do without proven and reliable sources; we must challenge mistaken assumptions about the speed with which alternatives will penetrate the market."