JP Morgan Slashes Its 2018 Oil Price Forecast By $11

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Yves here. Continued weak oil prices translates into even more political pressure in the Middle East. Moodys and other analysts estimated that Saudi Arabia could deal with two or three years of low oil prices, then their budgetary problems would start to bite. And that was before Riyadh went to war with Yemen and started pressuring Qatar. The new king isn’t well liked domestically and depleted coffers make it harder to maintain the support and veneer of legitimacy he needs.

Or as Pepe Escobar put it more vividly, in describing the motive for the Saudis to set the stage for a war with gas-rich Qatar:

The plain fact is the House of Saud is absolutely desperate. Oil price remains low, around $50 a barrel. The monster Saudi IPO on Aramco is only 12 months away. The House of Saud needs to move the markets towards a higher oil price by any means necessary – ultimatums and threats of war included.

By Tsvetana Paraskova, a writer for the U.S.-based Divergente LLC consulting firm. Originally published at OilPrice

The U.S. shale-vs-OPEC-cuts tale has been the predominant theme in oil markets this year, and like the cartel’s output cut, it will be rolling over into next year as well.

Major banks, the same that at the time of the initial OPEC deal were seeing the markets tightening and glut eliminated as soon as the second or third quarter this year, have started slashing their oil price forecasts for this year and next, as the six-month OPEC deal failed to rebalance the markets and cuts were extended into March 2018.

U.S. shale production is expected to continue growing through this year and into next year. Meanwhile, JP Morgan sees OPEC’s extension deal as having no exit strategy, with the cartel not communicating what its end game is.

“Neither the length of the extension, nor the compliance rate of its participants, concerns me as much as OPEC’s lack of an exit strategy. If OPEC really has the courage behind their convictions, then the optimal decision would have been to extend cuts through the end of 2018,” Ebele Kemery, head of energy investing at JP Morgan, said on the day on which OPEC announced they would roll over the cuts.

Major investment banks hastened to revise further down their oil price projections, seeing a flow of supply hitting the market as soon as production cuts expire in March 2018. Add the second U.S. shale boom to this, and it looks like the glut will return with a vengeance in 2018.

Last week, Goldman Sachs cut its Brent price forecast for this year to US$55.39 per barrel from its previous estimate of US$56.76 a barrel. It also revised down its WTI projections to US$52.92 from US$54.80 a barrel. Just days before that, Goldman said that it sees the oil glut returning after OPEC’s deal expires.

For 2018, it was JP Morgan that made the most drastic cut to its oil price projections, expecting not only U.S. shale to continue roaring back at OPEC, but also the cartel’s deal falling apart by the end of this year.

JP Morgan slashed its 2018 WTI forecast by US$11—from US$53.50 to US$42. The price projection for Brent was also axed, by US$10, from US$55.50 to US$45.

We assume that the OPEC/non-OPEC deal collapses at the end of 2017, as cheating becomes untenable for core OPEC members. Consequently, the 2018 oil market balance now points to rapid builds in inventories which, absent continued OPEC support, should depress oil prices,” David Martin, executive director at JP Morgan, said in the bank’s note, as quoted by Business Insider Australia.

On the other hand, U.S. crude output is expected to keep growing for several quarters due to lower breakeven costs and higher investment, according to JP Morgan.

To compare, as of January 30, 2017, merely a month into OPEC’s production cuts, JP Morgan’s global outlook 2017 suggested that “oil markets look set to tighten further in the coming quarters as better than expected compliance from OPEC ensures drawdowns in oil inventories.” The bank had expected back then Brent at US$58.25 for 2017 and at US$60 for 2018, and WTI – at US$56.25 a barrel in 2017 and US$58 in 2018.

In the oil markets, however, four months is a very long time, during which it became evident that OPEC’s efforts failed to draw down the glut in six months, and failed to lift prices. And now JP Morgan is the bank warning that oil prices may go substantially lower—not only compared to previous price projections, but also compared to the current price of oil.

JP Morgan also sees OPEC losing more than it gains with the output cut deal.

As we have previously flagged, the longer-term consequences of OPEC’s actions will likely prove unpleasant for the cartel’s members,” JP Morgan’s Martin said.

Other analysts do not see the current cuts balancing the oil market next year.

“If OPEC wants to keep the market balanced next year, they will probably need to extend the production cut to all of 2018,” Martijn Rats, managing director at Morgan Stanley in London, told Bloomberg in an email.

Currently, the expected surge in supply after the OPEC deal ends, coupled with continuous U.S. production gains, does not bode well for oil prices to move much higher in 2018 than they are now.

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11 comments

  1. different clue

    The rising middle classes of China and India will do their best to buy as much Saudi oil as they possibly can to get the price back up as high as possible.

    Maybe anti-terrorist Americans can lower their use of oil beyond what Chindia can make up for by raising their use of oil, and thereby keep the pressure on Saudi Arabia for some years to come.

    1. Vatch

      Yes! Fuel efficiency is a valid anti-terrorist strategy. When it’s time for a person to buy a car, one should buy the most fuel efficient vehicle in one’s price range that satisfies one’s needs.

  2. Tyronius

    The pressure the US wants to exert isn’t against Saudi Arabia but rather other less friendly nations. Despite the current administration’s flirtations with Russia, they remain the biggest threat to the United States and lower oil prices will help to contain their hard currency reserves and therefore their potential for mischief.

    1. different clue

      What does Russia threaten us with? And how long has Russia threatened us with it?

      What makes that Russian threat the biggest to the United States? How long has that Russian threat been the biggest threat to the United States?

    2. MoiAussie

      Keep sucking up that koolaid. Anyone who thinks KSA is a “friendly nation” needs their head read.
      And what does “a threat to the US” actually mean? Russia may be a threat to US destruction of sovereign states in the ME, but in what way is that a bad thing? Russia may also be a threat to some of the machinations of globalists, 1%ers, neocons and multinationals, but again, that’s no bad thing. Russia is not a real threat to US citizens, unless attacked by the US or its proxies. Russia is certainly not a threat to the US “democratic system”, which is threatened from within, and has been corrupted by internal forces such as SCOTUS decisions. The US is a far greater threat to the democratic systems of countries around the globe than Russia is or the USSR ever was.

      You are however quite right that “The pressure the US wants to exert isn’t against Saudi Arabia”, as US support for that vile regime, as for Israel, is effectively unlimited.

      1. Vatch

        KSA … “friendly nation”

        Gosh, 4 of the 19 September 11 hijackers did not have Saudi Arabian passports! That means that fewer than 80% of the 9/11 hijackers were Saudis!

  3. PlutoniumKun

    I assume all these assumptions are from a few days ago. The blockade of Qatar with its potential for major disruption could cause chaos in the market. I’m really surprised the markets have been so sanguine about it so far, it will only take one miscalculation by any of the major players to put a halt to tankers from the ME.

    1. Larry

      The fact that America’s largest military base in the Middle East is in Qatar certainly complicates the carry on effects of the Blusterer-in-Chief’s tweets. What good is a blockade if the US says you can’t blockade the country? And why would Qatar tolerate getting the screws put to it while the US continues to run sorties from it’s territory? I would say that Mr. Market is patiently waiting to see what the hell the official and real US response to Qatar will be.

    2. Jim Haygood

      JP Morgan slashed its 2018 WTI forecast by US$11—from US$53.50 to US$42.

      So 42 is the answer to Life, the Universe and everything. But we knew that.

      Currently we’re reveling in an inverse oil shock, where its price is down and — to the disgust and horror of James Howard Kunstler — Happy Motoring is back with a vengeance in America.

      Which raises an uncomfortable question: with wage groaf dead in the water and the most important global commodity price (oil) sinking like a stone, why are central banksters hiking?

      And it’s one, two, three
      What are we tightening for?
      Well I don’t give a damn
      Crude’s cheap in Rotterdam

      — Country Joe and the Fish

      1. a different chris

        >why are central banksters hiking?

        Because they can. Why do locusts eat everything in sight?

        Anyway, what the mess of the last few years shows is that the people that have been knocking solar and wind with their clever “when the wind doesn’t blow/when the sun doesn’t shine” need to get it right back in their faces.

        “When the well is drilled/when it isn’t drilled/when it is drilled but gets capped/when the tankers show up/when the tankers don’t show up/when they go to the Far East/when the Middle East is engulfed in war and the tankers don’t even get filled” — seems a lot more complicated than an occasionally cloudy or still day.

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