Morgan Stanley Warns of Refinery-Driven Oil Price Correction as Crude Slides Almost 3%

Morgan Stanley warns that refineries are set to squeeze crude oil purchases and drag prices even lower than Monday's three month low close.

Citing crude oil demand trending below refined product demand for the first time in three years, coupled with gasoline stocks at a five-year high, Morgan Stanley warns that refineries are set to squeeze crude oil purchases and drag prices even lower than Monday's three-month low close.

A new report from Morgan Stanley analysts headed by Adam Longsen states that, "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."

The report noted that overproducing refineries will have to cut back on capacity utilisation to protect profit margins, thus further impacting prices, and that the gasoline glut could prompt refiners to cease operation sooner and for longer than usual during their traditional summer production shutdown.

Morgan Stanley is not alone in thinking that a refinery-driven correction is upon us. A Citigroup Inc. report led by Aakash Doshi agrees that "Refinery margins are under pressure due to falling gasoline cracks as strong gasoline demand growth has been met by even stronger refinery supply."

The dire prognostications come as Brent crude futures on Monday trading at $44.65, down 2.28 percent from their previous close, and U.S. crude settled at $43.05, down 2.58 percent – the lowest settles since May 10 and April 26, respectively.

Michael D. Cohen, an analyst at Barclays Plc, joined Morgan Stanley and Citigroup in predicting that worrisome times are ahead for the market: he told Bloomberg, "If we've gone through the bulk of the summer driving season and haven't done much damage to gasoline supply, refiners are going to react.

"It will be hard to find investors that are willing to go long."

To which Michael Lynch, president of Strategic Energy & Economic Research, added, "People are looking ahead to the fall and are worried: there's more and more talk of prices going south of $40, and as a result people are going short."

Of course, many other factors have recently been cited as causes for continued market turbulence: BNP Paribas SA and JBC Energy GmbH predict $40 oil later this year due to production recovery in Canada, Iran, Nigeria, and the U.S.