Morgan Stanley sees rare forward curve for oil

by Nicholas Lua and Yongchang Chin

The global oil market is in very rare territory right now, with futures pricing that points to near-term tightness while also flagging a “meaningful surplus” further out, according to Morgan Stanley.

“The Brent forward curve has an unusual shape at the moment: downward sloping across the first nine contracts and upward sloping thereafter,” analysts including Martijn Rats and Charlotte Firkins said in a note. “This is so unusual that, in fact, there is little historical precedent,” they said.

Crude has been rocked this month by the fall-out from the US-led trade war, moves by OPEC+ to boost supply at a faster-than-expected clip, and growing expectations for a surplus. Those drivers have combined to spur a steep drop in headline prices in April — with Brent 12% lower — but simultaneously suggest a more complex underlying story about the timing of the glut.

At present, Brent’s nearer months are still pricier than those next in sequence, a pattern known as backwardation that’s seen as bullish as it shows traders are willing to pay a premium for more prompt barrels. But the curve flips to the opposite structure, known as contango, further into 2026.

“The contango after the ninth contract signals a rapid weakening later this year, with slowing demand and robust supply growth driving a surplus,” the analysts said. “In about 30 years’ of historical data, there has not been another period when the forward curve showed a ‘smile’ the way it currently does.”

Global benchmark Brent is expected to drop back into the low $60s-a-barrel later this year, according to Morgan Stanley, which retained its quarterly forecasts. Futures for the soon-to-expire front month of June were last below $65 a barrel, while those for July were about $1 lower.

“Trade tariffs will turn into a meaningful headwind for oil demand,” the analysts said. “Our crude balance shows a deficit in the third quarter, but this turns into a meaningful surplus thereafter.”

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