Downside risks building in oil prices - Morgan Stanley

Downside risks are building in the oil market after the price surge of recent weeks, Morgan Stanley analysts said.

Oil price fundamentals have improved after the crash in March but prices have already risen strongly and risks of declines are now starting to mount up, Morgan Stanley said. The investment bank left its longer-term estimate for Brent unchanged at $45 a barrel.

US shale is "in the money" with WTI prices at $41 a barrel and production will become too high if WTI trades much above $40 a barrel, Morgan Stanley said.

After the OPEC+ countries showed discipline in cutting production but compliance could weaken at higher prices and there is little need to keep shut-in supply offline, the bank's analyst Martijn Rats said.

Demand is still fragile and a reversal of the surge in Chinese imports would undermine prices, Rats said. In several important OPEC states Covid-19 infection rates have not slowed down, he added.

"OPEC has extended its deepest production cuts by another month, the S&P 500 is surging higher and the US dollar continues to weaken. These are all major tailwinds allowing prices to trend higher," Rats wrote in a note to clients. "Oil prices have - rightly - responded positively. However, after more than doubling from their lows they have now reached levels where meaningful downside risks are starting to build."