Morgan Stanley recently revised its outlook on the oil market, reflecting a more cautious stance amid signs of increasing supply and weakening global demand. The bank’s revised forecasts indicate a shift in market dynamics, with important implications for oil prices and demand growth.

While Morgan Stanley expects Brent crude to fall to $80 per barrel later this year, it’s still a healthy enough level for market participants. Therefore, investors interested in the sector could benefit from having quality stocks SM Energy Company (SM Quick QuoteSM - Free Report) , TechnipFMC plc (FTI Quick QuoteFTI - Free Report) and Tullow Oil (TUWOY Quick QuoteTUWOY - Free Report) .

Demand Growth Expectations Lowered

Morgan Stanley has adjusted its global oil demand growth forecast for 2024, reducing it from 1.2 million barrels per day (bpd) to 1.1 million bpd. This revision is primarily driven by slower economic growth in China, which has been a critical factor in the global oil market. China’s economy — a significant engine of global oil demand — is now showing signs of slowing down, particularly in the industrial sector. Additionally, the rapid adoption of electric vehicles (EVs) and the increased use of liquefied natural gas (LNG)-powered trucks in China have further contributed to the reduction in oil demand. Morgan Stanley estimates that these shifts alone have decreased China’s oil demand growth by approximately 200-250 thousand bpd.

Price Forecast Adjustments

In response to the evolving supply-demand dynamics, Morgan Stanley has also adjusted its Brent crude price forecasts. The bank now expects the global benchmark to average $80 per barrel in the fourth quarter of 2024, down from the previous estimate of $85 per barrel. Looking ahead, Morgan Stanley predicts a gradual decline in Brent prices, with expectations of $75 per barrel by the end of 2025, slightly lower than its prior forecast of $76. This downward revision reflects the market’s anticipation of increased supply from both OPEC and non-OPEC producers, as well as the expected softening in demand growth.

Supply Dynamics and Market Tightness

Despite the lower demand forecast, Morgan Stanley notes that the oil market remains tight in the short term. The bank observes that global inventories have been drawn down by about 1.2 million bpd over the last four weeks, a trend expected to continue throughout the third quarter of 2024. However, as demand slows post-summer and both OPEC and non-OPEC supply increase, Morgan Stanley foresees a rebalancing of the market, potentially leading to a surplus by 2025. This shift in dynamics will depend on the scale of supply increases.

Comparison With OPEC’s Outlook

Morgan Stanley’s revised outlook aligns closely with the recent forecast adjustments made by OPEC. Like Morgan Stanley, OPEC has also cited China’s economic slowdown as a significant factor in its decision to lower its oil demand growth forecast for both 2024 and 2025. However, while OPEC’s focus remains on managing supply through production cuts to support prices, Morgan Stanley’s analysis suggests that these efforts may be insufficient to offset the expected increase in non-OPEC supply and the gradual decline in demand growth.

The Way Forward

As an investor in the Oil/Energy space, the current landscape suggests a period of cautious optimism. While the immediate future may still see tight market conditions, the longer-term outlook points toward a more balanced market with potential downward pressure on prices. The key factors to watch will be the pace of demand recovery, particularly in emerging markets, and the effectiveness of OPEC’s production strategies in managing supply.

3 Stocks to Buy

While Morgan Stanley’s revised outlook suggests more subdued demand growth, the market’s inherent volatility and the ongoing energy transition present both challenges and opportunities for investors. The next few years will likely redefine the global oil market, where adaptability and strategic foresight will be crucial in navigating the evolving landscape. At the same time, with geopolitical risks being a constant threat to supplies, a sudden price boost for the commodity cannot be ruled out. This dynamic could lead to a more competitive market environment, potentially stabilizing prices in the medium term.

Amid the uncertainty, it is necessary that investors adopt a cautious approach. It is prudent to opt for stocks that have enough room for upside. While it is impossible to be sure about such outperformers, this is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.

We recommend accumulating stocks like SM Energy, TechnipFMC and Tullow Oil. SM Energy currently sports a Zacks Rank #1 (Strong Buy), while TechnipFMC and Tullow carry a Zacks Rank #2 (Buy) each.

You can see the complete list of today’s Zacks #1 Rank stocks here.

SM Energy Company: SM beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters. The independent oil and gas exploration and production company has a trailing four-quarter earnings surprise of 11.9% on average.

SM is valued at around $5.2 billion. SM Energy has seen its shares increase 11.5% in a year.

TechnipFMC: The Zacks Consensus Estimate for 2024 earnings of Sunoco indicates 197.8% growth.

The leading oilfield equipment supplier is valued at around $11.4 billion. TechnipFMC has seen its stock surge 43.5% in a year.

Tullow Oil: TUWOY is valued at some $555.2 million. Over the past 30 days, the Zacks Consensus Estimate for 2024 earnings has increased 8.3%.

Tullow Oil enjoys a Value and Growth Score of A and B, respectively, each helping it round out with a VGM Score of A. This Africa-focused hydrocarbon producer and explorer’s shares have lost 13.5% in a year.