Morgan Stanley told clients Thursday that the weakness in refining margins is temporary and predicted widening margins in coming months.

The bank said that May crude processing levels have been about 81.4 million b/d, or a significant 1 million b/d below expectations. Some of the blame for the lower run rates is attributed to Ukrainian drone attacks on Russian plants, but Morgan analysts also cited a brisk second-quarter turnaround season as well as run cuts for some Asian topping plants that labored through the month.

The investment house acknowledged some weakening in demand but believes that refinery input in June will approach 84 million b/d, rising to 84.95 million b/d in July and 85.06 million b/d in August.

Morgan said that despite some modest U.S. gasoline demand destruction, global demand for motor fuel has surprised to the upside, with gains of about 95,000 b/d.

The bank continues to predict problems for high-octane gas. Some low-octane naphtha has been displaced as a feedstock for petrochemicals and refiners will need to rely on high-octane components that will help the overall gasoline pool pass muster. Reformers are already running at full capacity, Morgan said, so there's plenty of upward pressure on high-octane components. The bank cited a seasonal template that points toward higher refining margins.

Between 2015 and 2023, excepting the pandemic years of 2020 and 2021, the April to August global demand increase has never been less than 2.9 million b/d, and it has been as high as 4.8 million b/d. Morgan said it believes that products are "only in the foothills" of the typical seasonal increase.

The bank projects a likely products surge of 3 million b/d once turnarounds are completed. That boost points toward tightening refined product markets in summer months. Late May saw a flirtation with narrow cracks that sometimes inspire run cuts, but Morgan Stanley hinted that the worst margin pressure may be history.

But the bank is not bullish beyond the third quarter. In fourth-quarter 2024 as well as in 2025, it sees margins yielding much of their strength. The bank doesn't see new refineries in Nigeria (650,000 b/d) or Mexico (340,000 b/d) regularly exporting gasoline this year but believes both plants may weaken cracks in 2025 and inspire margins closer to historical averages.

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 Tom Kloza,; Editing by Michael Kelly,

(END) Dow Jones Newswires

05-28-24 1547ET