Refining margins could soften in the first half of 2025 before recovering in the H2 amid moderating economic growth, Morgan Stanley said in a note Thursday.

The report said net capacity adds are set to slow from a year ago, with new refineries partially offset by closures, while demand continues to grow next year.

"Timing is a key swing factor and could result in a softer 1H before a 2H margin recovery," Morgan Stanley said.

In terms of valuation, Morgan Stanley said its large-cap coverage offers a median free cash flow to enterprise value yield of around 6%, which is about twice that of the broader market, though in line with the overall Energy sector.

"Putting it all together, while the global economy is set to slow modestly next year, refined product demand should continue to grow, with China remaining a key variable," the report said.

Still, additional capacity is set to come online, likely keeping cracks under pressure in H1 2025 until refinery closures materialize, which should help support margins in H2 and beyond, the report added.

"In that backdrop, we prefer larger, more defensive exposure including overweight-rated Marathon Petroleum and HF Sinclair," the report said.

Morgan Stanley cut its price target for Delek US Holdings (DK) to $19 from $21, HF Sinclair (DINO) to $51 from $55, Marathon Petroleum (MPC) to $174 from $181, Phillips 66 (PSX) to $140 from $144, PBF Energy (PBF) to $31 from $34, and Valero Energy (VLO) to $160 from $165.

Price: 16.37, Change: -0.45, Percent Change: -2.65