In short
Morgan Stanley commodity strategist Martin Rats explains why oil could rise again, arguing the market is tightening and Brent may reach $100 per barrel later in 2025.
Guest backgrounds
No guests. Host is Martin Rats, Morgan Stanley Global Commodity Strategist.
Key claims
Falling inventories (crude on water down ~190 million barrels mid-July to recent; fastest 4-week decline in ~8 years) signal reduced buffers. Middle East supply remains constrained (Sredavramoos flows ~15 mb/d then ~7 mb/d; Red Sea exports ~4–4.5 mb/d in Mar–Apr to ~1.5 mb/d now). Strategic petroleum reserve releases are fading after September. China imports have stabilized, limiting “freed” barrels.
Notable examples
Diesel crack spread hit ~ $100/bbl (US front-month diesel ~$195 vs Brent ~$95), reflecting refinery outages (5–6 mb/d above normal) shifting tightness from crude to refined products. Forecast: Brent averages ~$100 in Q4; Middle East recovery may take into 2027, keeping inventories falling into Q1 2026.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOMarket Overview and Recent Trends
0:12 to 0:50
Discussion on the recent fluctuations in oil prices and market tightening.
“It has been an extraordinary summer for oil.”
Supply Tightening and Inventory Changes
0:50 to 1:50
Insights into falling oil inventories and tightening supply in the market.
“Supply is tightening, inventories are falling and some of the buffers that helped absorb earlier disruptions are fading.”
Middle East Supply Issues
1:50 to 2:36
Analysis of crude oil flows and challenges from the Middle Eastern market.
“Crude flows from the Sredavramoos briefly recovered to about 15 million barrels a day after the June Memorandum of Understanding.”
China's Impact on Global Oil
2:36 to 3:02
The significance of China's oil imports on the global market dynamics.
“Its seaborne crude oil imports are normally around 10 to 11 million barrels a day, but briefly fell as low as 5 million barrels a day, leaving more oil available elsewhere.”
Refinery Dynamics and Crack Spreads
3:02 to 4:05
Explaining how refinery outages impact crude demand and refined product prices.
“If Chinese imports have stopped falling, and possibly go into reverse, they can no longer free up additional barrels for buyers elsewhere, making the global oil market tighter.”
Forecasting Future Oil Prices
4:05 to 4:57
Expectations for Brent prices and market conditions moving forward.
“Over time, that gives refiners a very strong incentive to bring back capacity where they can.”
Transcript
Automatic transcript. May contain errors.0:00Martijn Rats:Welcome to Thoughts on the Market. I'm Martin Rats, Morgan Stanley's Global Commodity Strategist. Today, why the oil market is tightening, and why we now see Brent reaching$100 per barrel later this year. It's Thursday, September 3rd, at 3pm in London. It has been an extraordinary summer for oil. Brent, the global benchmark price for crude oil, and the reference point for most of the world's oil trade, Traded above$110 per barrel in mid-May Fell to$71 by early June Climbed back above$100 three weeks later And then dropped again to around$79 per barrel More recently, the prices have moved higher again But the question now is whether that is just another temporary swing Or whether there is a sign that the underlying market has changed We think it's changed Supply is tightening, inventories are falling and some of the buffers that helped absorb earlier disruptions are fading.
0:57Martijn Rats:The clearest evidence is in inventories. Crude oil sitting on the water fell from nearly 1.3 billion barrels in mid-July to 1.1 billion barrels recently. That was a decline of about 190 million barrels. During one four-week stretch, oil on water fell at the unusually high rate of 5.3 million barrels a day, the fastest four-week decline since this data series began about eight years ago. Usually, when there is such a large amount of crude oil that is brought on land, it drives up onshore oil inventories. However, not on this occasion. On a global basis, onshore crude oil inventories have fallen by another 38 million barrels over the same period.
1:41Martijn Rats:That means that those offshore barrels arriving were being used straight away rather than put into land-based storage. The biggest supply issue is still the Middle East. Crude flows from the Sredavramoos briefly recovered to about 15 million barrels a day after the June Memorandum of Understanding. That was close to the pre-conflict level. More recently, however, they've been running again around about 7 million barrels a day. Now, Red Sea exports have fallen sharply from about 4-4.5 million barrels per day in March and April to around about 1.5 million barrels a day at the moment. Therefore, total regional exports are still up from the lows in March and April, but they are sharply down from that late June peak.
2:25Martijn Rats:Another source of support is fading, strategic petroleum reserves. Globally, those releases added around 2.5 million barrels a day to supply in March and April, but that has fallen sharply and we do not anticipate material further releases from global SPRs after September. Then, China is important too. Its seaborne crude oil imports are normally around 10 to 11 million barrels a day, but briefly fell as low as 5 million barrels a day, leaving more oil available elsewhere. China's buying activity still appears low, but at a minimum it has stabilized and there are tentative signs of an increase.
3:04Martijn Rats:If Chinese imports have stopped falling, and possibly go into reverse, they can no longer free up additional barrels for buyers elsewhere, making the global oil market tighter. So why hasn't crude become even more constrained? It's because of refineries. Global refinery outages are running 5 to 6 million barrels a day above normal. Although supply of crude oil is constrained, this means that demand for crude is also reduced. Now the result of that is that the tightness in the system has instead shown up in refined products rather than in crude. And diesel is the clearest example of this, and the one most likely to be felt throughout the economy since diesel prices feed straight through into trucking, freight, farming costs and many other areas.
3:50Martijn Rats:The front month diesel benchmark in the US was recently around$195 per barrel versus Brent at$95 per barrel. The difference between the value of a refined product and the crude used to make it is called a crack spread. For diesel, that crack spread reached around$100 per barrel an all-time high. Over time, that gives refiners a very strong incentive to bring back capacity where they can. If they do, crude demand should rise whilst inventories are already falling and Middle East supply so far remains constrained. We now expect the full recovery in Middle East supply to take well into 2027. On that path, oil inventories should keep falling throughout the fourth quarter of this year as well as the first quarter of next year.
4:38Martijn Rats:We now forecast Brent to average$100 per barrel in the fourth quarter. For much of this year, the oil market had several shock absorbers. Strategic reserves, abundant barrels at sea, and unusually weak Chinese imports all helped. Those cushions are thinner now. That leaves less room for another disruption, just as the road back to normal supply is getting longer. Thanks for listening. If you enjoyed the show, please leave us a review wherever you listen. and share thoughts on the market with a friend or colleague today. The preceding content is informational only and based on information available when created.
5:18It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
Our Global Commodities Strategist Martijn Rats explains how tightening supply and shrinking buffers are pushing Brent prices up again, and what that would mean for fuel costs and energy markets.
Read more insights from Morgan Stanley.
----- Transcript -----
Martijn Rats: Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan Stanley’s Global Commodities Strategist.
Today: why the oil market is tightening, and why we now see Brent reaching $100 per barrel later this year.
It’s Thursday, September 3rd, at 3pm in London.
It has been an extraordinary summer for oil. Brent — the global benchmark price for crude oil and the reference point for most of the world's oil trade — traded above $110 per barrel in mid-May, fell to $71 by early June, climbed back above $100 three weeks later, and then dropped again to around $79 per barrel. More recently, prices have moved higher again.
But the question now is whether that is just another temporary swing. Or whether there is a sign that the underlying market has changed.
We think it has changed. Supply is tightening, inventories are falling, and some of the buffers that helped absorb earlier disruptions are fading.
The clearest evidence is in inventories. Crude oil sitting on the water fell from nearly 1.3 billion barrels in mid-July to 1.1 billion barrels recently. That was a decline of about 190 million barrels. During one four-week stretch, oil-on-water fell at the unusually high rate of 5.3 million barrels a day, the fastest four-week decline since this data series began about eight years ago.
Usually, when there is such a large amount of crude oil that is brought on land, it drives up onshore oil inventories. However, not on this occasion. On a global basis, onshore crude oil inventories have fallen by another 38 million barrels over the same period. That means that those offshore barrels arriving were being used straight away rather than put into land-based storage.
The biggest supply issue is still the Middle East. Crude flows from the Strait of Hormuz briefly recovered to about 15 million barrels a day after the June Memorandum of Understanding. That was close to the pre-conflict level. More recently, however, they have been running again around about 7 million. Now, Red Sea exports have also fallen sharply, from about 4 - 4.5 million barrels a day in March and April to around about 1.5 million barrels a day at the moment. Therefore, total regional exports are still up from the lows in March and April, but they are sharply down from that late June peak.
Another source of support is fading: strategic petroleum reserves. Globally, those releases added around 2.5 million barrels a day to supply in March and April. But that has fallen sharply, and we do not anticipate material further releases from global SPRs after September.
Then China is important, too. Its seaborne crude imports are normally around 10 to 11 million barrels a day but briefly fell as low as 5 million barrels a day leaving more oil available elsewhere. Now, China's buying activity still appears low, but at a minimum it has stabilized, and there are tentative signs of an increase. If Chinese imports have stopped falling and possibly go into reverse, they can no longer free up additional barrels for buyers elsewhere, making the global oil market tighter.
So why hasn’t crude become even more constrained? It's because of refineries. Global refinery outages are running 5 - 6 million barrels a day above normal. Although supply of crude oil is constrained, this means that demand for crude is also reduced.
Now, the result of that is that the tightness in the system has instead shown up in refined products rather than in crude. And diesel is the clearest example of this; and the one most likely to be felt throughout the economy, since diesel prices feed straight through into trucking, freight, farming costs, and many other areas.
The front-month diesel benchmark in the U.S. was recently around $195 per barrel, versus Brent at $95 per barrel. The difference between the value of a refined product and the crude used to make it is called a crack spread. For diesel, that crack spread reached around $100 per barrel, an all-time high.
Over time, that gives refiners a very strong incentive to bring back capacity where they can. If they do, crude demand should rise, whilst inventories are already falling and Middle East supply so far remains constrained.
We now expect a full recovery in Middle East supply to take well into 2027. On that path, oil inventories should keep falling throughout the fourth quarter of this year as well as the first quarter of next year. We now forecast Brent to average $100 per barrel in the fourth quarter.
Now, for much of this year, the oil market had several shock absorbers: strategic reserves, abundant barrels at sea, and unusually weak Chinese imports all helped. Those cushions are thinner now. That leaves less room for another disruption, just as the road back to normal supply is getting longer.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.