Morgan Stanley Predicts Plummeting Oil Prices - $35 Likely

The price of oil will likely continue to falter in the latter half of this year amid an oversupply of gasoline, according to a Morgan Stanley study published last Sunday.

The Morgan Stanley analysts predicted numerous “worrisome trends” for the supply and demand of oil, chief of which is an excessive production of gasoline by refineries. The study’s authors believe that faced with the need to cut back on capacity utilization to protect profit margins, these refineries will cut back on crude oil purchases and drag prices lower in an attempt to protect profit margins.

“Crude oil demand is trending below refined product demand for the first time in three years…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,” the report detailed.

Oil prices have fallen by more than US$8 in the past few weeks to a rate of around US$45 per barrel this week, yet the experts implied the price of crude could reach as low as US$35 per barrel.

The “bearish bias” by Morgan Stanley is the opposite of several bullish outlooks from institutions such as Goldman Sachs, which last May forecast an uptick in the price of crude this year.

At the time, the firm believed supply and demand in the oil market would rebalance itself earlier than expected. Since then, however, disruptions that affected the sector such as huge wildfires in Canada and a crippling strike by Kuwaiti oil workers have had a lesser impact on investors.

The concerns from Morgan Stanley’s analysts echo those of their counterparts from Citi. “Refinery margins are under pressure due to falling gasoline cracks as strong gasoline demand growth has been met by even stronger refinery supply…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,” according to Citi.

By Erwin Cifuentes for Oilprice.com

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