Morgan Stanley's upgraded forecasts point to a market that is tightening faster than expected, with falling oil-on-water and onshore inventories, including in China, reinforcing the bank's deficit call through into early 2027. The unusually wide gap between crude and refined product prices, with gasoil trading far above Brent, points to strained refining capacity alongside the crude-side tightness. On the equity side, Wilson's framing of oil as the single biggest risk to US stocks adds a cross-asset dimension, tying any renewed crude spike to higher bond yields and potential pressure on the Fed to respond. His preference for energy shares as a portfolio hedge, alongside quality names more broadly, signals how positioning may shift if the bank's more bullish oil view plays out.---Earlier:Crude oil futures settled at $85.01---Morgan Stanley now sees oil staying tighter for longer, and its equity strategist says a renewed spike is the single biggest threat hanging over the US stock market.Summary:Morgan Stanley raised its Brent forecasts to around $90 in the third quarter of 2026, $100 in the fourth quarter, $95 in the first quarter of 2027 and $90 in the second quarter, up from a prior assumption of around $75 across all four quartersThe bank cited a slower than expected Middle East supply recovery, now expected to extend well into 2027, keeping the market in deficit through the fourth quarter of 2026 and first quarter of 2027Oil-on-water has fallen by roughly 170 million barrels since mid-July, with onshore inventories, including in China, also decliningMiddle East exports have retreated toward levels last seen in March and AprilThe bank flagged an unusual gap between crude and refined products, with gasoil trading around $175 a barrel against Brent near $92, producing a record crack spread of roughly $75Separately, Morgan Stanley's Michael Wilson said a renewed spike in oil prices is the biggest risk facing US stocks, recommending energy shares as a hedge and reiterating a preference for quality namesMorgan Stanley has sharply raised its Brent crude forecasts, arguing that a slower than expected recovery in Middle East supply will keep the oil market in deficit well into next year. The bank now sees Brent averaging around $90 a barrel in the third quarter of 2026, before peaking near $100 in the fourth quarter, then easing to about $95 in the first quarter of 2027 and $90 in the second quarter, according to a note issued Sunday. That marks a substantial upgrade from its previous assumption of roughly $75 across all four quarters.The revision reflects a market tightening faster than the bank had anticipated. Morgan Stanley pointed to one of the sharpest declines in oil-on-water in recent weeks, alongside falling onshore inventories, including in China, as evidence that supply buffers are eroding. Oil held at sea has dropped by roughly 170 million barrels since mid-July, while Middle East exports have retreated toward levels last seen in March and April. The bank said it is now pushing back its assumption for when the region's supply recovery completes, with that process now expected to run well into 2027.Morgan Stanley also flagged an unusual dislocation between crude and refined product markets. Gasoil has been trading around $175 a barrel against Brent near $92, producing a record crack spread of roughly $75, a gap the bank said underscores how tight the physical market has become even as headline crude prices remain well below their prior cycle peaks.The tighter oil outlook carries implications beyond the energy complex. Morgan Stanley's chief US equity strategist, Michael Wilson, has separately warned that a renewed spike in oil prices is the single biggest risk facing US stocks, and has recommended using energy shares to hedge broader portfolios. Wilson argued that another leg higher in crude could push bond yields up further and eventually force the Federal Reserve to respond as it works to bring inflation back to target, though he said the central bank would likely act only after some additional market instability. Treasury yields on 30-year debt have already climbed to near two-decade highs, prompting the Treasury to step up debt buybacks.Wilson noted that US stocks have historically suffered more when oil rises than they have benefited when it falls, making price stability in crude increasingly important for equities. He continues to favour so-called quality stocks with steady earnings and strong margins, arguing that the S&P 500's heavier weighting toward such names helped cushion it during July's semiconductor-led selloff, and that this composition is one reason he still prefers US equities over international markets. This article was written by Eamonn Sheridan at investinglive.com.