Surging U.S. oil supplies may soon struggle to find a buyer, and Morgan Stanley believes that could create winners in the stock and commodity markets.
Output from American shale oil fields has pushed U.S. crude production to all-time highs. But Morgan Stanley warns that the nation's shale wells are mostly yielding a type of light oil for which domestic refiners don't have much use.
Most American refineries are configured to process heavier crude grades, creating a mismatch with the growing supply of light shale oil being extracted in places like the Permian Basin in Texas.
"Our thesis is that the US refining system is close to being maxed-out on the amount of shale oil it can process," wrote Morgan Stanley equity analysts, led by Martijn Rats, the head of the bank's European oil and gas research team.
Refiners have compensated by blending the super light shale oil with gunkier grades, but those heavy crudes are in short supply, says Morgan Stanley. Output from heavy crude producers Venezuela and Mexico is falling, and pipeline bottlenecks are keeping it from being shipped from Canada.
That means more shale barrels will have to be exported, but Morgan Stanley sees trouble here, too.