Analysts at Morgan Stanley on Monday reiterated their belief that the fundamental outlook for oil markets is currently soft, but said there is the possibility of prices being supported by geopolitical risks.

The bank notes that the tariff and counter-tariff regime has the potential to weigh on oil-intensive sectors of the global economy and that is leaving a question mark for energy demand.

Additionally, analysts note that OPEC oil production quotas will be rising starting in April and that is likely to result in a surplus in the supply-demand balance, though the bank believes the surplus will be modest throughout the year.

Morgan Stanley analysts acknowledged they had thought OPEC would extend the current production cuts. But, between the supply additions and compensatory cuts, Morgan Stanley forecasts OPEC supply being 100,000 b/d higher in the second half of this year versus the second half of 2024.

Overall the bank anticipates a second half 2025 surplus of 600,000 b/d and there is upside risk to that figure from Libya, Kazakhstan and Iraq.

The geopolitical risk comes mainly from Iran, and the bank sees production there declining by about a half-million b/d over the next 12 months, though that is uncertain.

Morgan Stanley forecasts demand growth of 900,000 b/d, down 100,000 b/d from the previous outlook and that is the lower end of the consensus range of 1.1 million b/d. The long-term historical trend has been growth of 1.2 million b/d, so 2025 is only slightly below trend. In 2026, consensus demand growth slows to 850,000 b/d.

Risks to demand, according to the bank come from China's oil demand being under pressure and uncertainty created by trade tariffs.

According to the analysis, non-OPEC supply is likely to increase by 1.3 million b/d in 2025, thanks largely to the U.S., Canada, Brazil, Guyana and Argentina, along with global biofuels and NGL's.

"After a 'fat spot' during most of 2024, non-OPEC non-Russia production has shown a re-acceleration again in the last few months," the bank said regarding non-OPEC growth.

Growth in non-OPEC production and OPEC adding supply could push the balance into further surplus.

"Assuming the average of several forecasts for non-OPEC, and 1 mb/d supply growth for OPEC, supply can reach 108 mb/d in 2027, which would likely overshoot demand considerably," the bank said.

The bank notes that the flat price for Brent does appear to be low when compared to where the calendar spreads are, and that is likely the market discounting some anticipated weakness later in the year. That, combined with rising inventories, likely drives Brent down to about $67.50/bbl later this year, the forecast said.

Morgan Stanely also points out that outside of the COVID era, crude oil has never been cheaper relative to gold since the 1930s. The bank said the oil/gold ratio is currently less than 60% below its 100-year average. There is also a strong correlation between oil price performance and that of cyclical vs defensive stocks, which suggest that the downward movements have been largely driven by demand concerns.

Global refining margins have found some strength in February, but that has reversed recently.

"Support for refining margins has recently come mostly from fuel oil and naphtha; diesel remains robust whilst gasoline cracks have trended sideways," the report said.

The bank said that refinery outages in the first two months were relatively normal and sees runs bottoming out in April, when seasonal support starts to kick-in. Refinery closures are ramping up, the bank notes with a little more than 1.1 million b/d of global capacity coming out of the system, but even with closures, capacity is likely to grow by about 600,000 b/d through year-end.

This content was created by Oil Price Information Service, which is operated by Dow Jones & Co. OPIS is run independently from Dow Jones Newswires and The Wall Street Journal.

Reporting by Denton Cinquegrana, dcinquegrana@opisnet.com; Editing by Steve Cronin, scronin@opisnet.com

(END) Dow Jones Newswires

March 25, 2025 15:18 ET (19:18 GMT)

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