Oil prices are undervalued due to a market deficit, with the potential risk to Iran’s supply from possible sanctions under U.S. President-elect Donald Trump, according to the heads of commodities research at Goldman Sachs and Morgan Stanley.

“We think that oil prices are about $5 per barrel undervalued relative to the fair value based on the level of inventories,” Daan Struyven, co-head of global commodities research at GS told reporters on Wednesday.

The oil market is estimated to be in a deficit of about half-a-million barrels per day over the past year, Struyven said, adding that China and the U.S. are likely to continue restocking strategic reserves for energy security.
He said these factors, along with lower output from OPEC+ producers and a potential tightening of sanctions on Iran that could cut supply by around 1 million barrels per day, could push oil prices higher in the short term.

Brent is projected to peak at about $78 a barrel by next June, before easing to $71 by 2026, as there is significant spare capacity available to address supply shortages whenever needed, Struyven said.

Brent crude futures LCOc1 are trading under $73 a barrel on Wednesday after Israel agreed to a ceasefire deal with Hezbollah while OPEC+ is discussing a delay in unwinding of production cuts.

Martijn Rats, chief commodity strategist at Morgan Stanley, told Reuters last week that oil prices should be a couple of dollars higher as inventories are low.

“We can point at some of this to demand weakness, but there’s also been some supply weakness and in many ways this story about this looming surplus, is a story for next year,” he said.

While the oil supply surplus is expected to reach 1 million bpd next year, driven by non-OPEC+ output, there is no historical precedent for such a surplus, as producers typically cut output and demand increases when prices drop, Rats noted.

“We’re talking about the balance like a year out so, I think the price of oil today is already a little bit over anticipatory of what lies ahead.”

Source: Reuters reported by Florence Tan, additional reporting by Tony Munroe and edited by Sherry Jacob-Phillips