Morgan Stanley on Oil Prices: 'A Refinery-Driven Correction Is Upon Us'
Gear up for a fall in oil prices.
The global oil market is "severely oversupplied" with gasoline — with stocks at a five-year high — serving as a blow to crude prices from next month, reckon Morgan Stanley analysts led by Adam Longson.
In a report published on Sunday, the analysts foresee "worrisome trends" for oil supply and demand, led by refineries generating too much gasoline in recent months. Faced with the need to cut back on capacity utilization to protect profit margins, these refineries are set to crimp crude oil purchases and drag prices lower, the analysts say.
"Crude oil demand is trending below refined product demand for the first time in three years," they write. "Refineries are the true consumer of crude oil, and crude oil demand is ultimately more important than aggregate refined product demand for oil balances. Given the oversupply in the refined product markets, fading refinery margins, and economic run cuts, we expect crude oil demand to deteriorate further over the coming months."
A glut of gasoline could weigh significantly on oil prices, which have been lifted in recent weeks by supply disruptions and healthy petrol demand in emerging markets. Excess gasoline also means that refiners may close their doors sooner and for longer than usual during their traditional summer production shutdown, taking further demand out of the market.
In a report published on Monday, analysts at Citigroup Inc. also take up the refining theme. "Refinery margins are under pressure due to falling gasoline cracks as strong gasoline demand growth has been met by even stronger refinery supply," Citi analysts led by Aakash Doshi write. They believe that the elevated stock of crude and petroleum product, macro concerns, and a stronger U.S. dollar are all headwinds for oil prices.