Demand for diesel and jet fuel will help push oil prices to $90 a barrel in 2020, according to Morgan Stanley.
The investment bank previously forecast Brent would average about $65 in each of the four quarters of 2020. Brent hit a three-and-a-half-year high at $79.47 a barrel on Tuesday. It hasn't risen above $90 a barrel since October 2014.
But Morgan Stanley warns that stockpiles of middle distillates, which include diesel and jet fuel, are nearing five-year lows as demand for the fuel grows. Refineries around the world are now struggling to keep pace with consumption, it says.
"Over the next few years, we expect tightness in one particular product — middle distillate — to lead to strength in one particular liquid, crude oil, and especially those crudes that look like Brent," Martijn Rats, Morgan Stanley's global oil strategist, said in a research note on Tuesday.
That demand will grow by roughly another 1.5 million barrels a day due to tighter pollution rules in the shipping industry, Morgan Stanley projects.
In 2020, the International Maritime Organization will enforce new emissions standards that will require ships to either install equipment to scrub pollutants from engines or use cleaner-burning low-sulfur fuel. Morgan Stanley says most shippers will opt for the latter, effectively shifting demand from other fuel types to distillates.
Meanwhile, most of the growth in global oil production is coming from natural gas liquids and condensates, a type of super light oil. That's a problem because neither of those liquids are used to make middle distillates, Morgan Stanley says.
According to the bank's estimates, global crude oil output would need to grow by 5.7 million barrels a day by 2020 to meet growing distillate consumption. Morgan Stanley does not think that's possible.
"We see global crude production re-accelerating again, but falling well short of this level. Since 1984, crude oil production growth over a 3-year period has reached this level only once," Rats said.
On Wednesday, the International Energy Agency said it expects oil from countries outside OPEC to grow by nearly 1.9 million barrels a day this year.
The crude shortfall will help push gasoil prices to about $850 per ton, or 25 percent to 30 percent above today's levels, Morgan Stanley projects. That will consequently push Brent to $90 a barrel.