“That would be the way to hell for America,” JP Morgan CEO Jamie Dimon said last week, referring to a suggestion that all major banks would divest from the oil and gas industry.
That same week, Aramco’s chief executive warned that years of underinvestment in new oil production were beginning to pay off, which is an undersupplied market.
Despite these statements suggesting that oil prices should rise, oil fell for much of the week. Yet he was not driven by the fundamentals. Oil prices are falling because many traders and investors are preparing for a recession.
The bad news is that even in a recession, oil prices can rise, and that’s exactly what some of the banks that kept JP Morgan company at last week’s congressional hearing expected.
In fact, JP Morgan was one of the bullish forecasters. Last week, analysts at the big bank wrote in a note that they expected Brent crude to rebound to $101 in the fourth quarter. Analysts cited tighter supply as the reason for their forecast.
Goldman Sachs is even more optimistic. Three weeks ago, analysts at the bank said Brent could hit $125 next year despite oil price caps touted by the G7 as a tool both to keep the market supplied with oil Russian and to lower prices. They remain bullish to this day. Related: An Oil Supply Shock May Be Imminent
Morgan Stanley is a little more modest in its price expectations, seeking Brent at $95 a barrel in the final quarter of the year. It should be noted that this is a downgrade to the bank’s fourth-quarter price outlook, which occurred two weeks ago, driven by growing fears of recession.
UBS also lowered its price forecast earlier this month, again citing recession fears as well as the continued flow of Russian oil to Asian importers. This downward revision, however, took Brent to $110, with analysts noting that it could hit $125 by the end of the third quarter of 2023.
The reasons given by the Swiss bank for the expected rebound are as interesting as they are worrying. According to UBS, oil prices would not rebound due to the recovery of the global economy. They would rebound due to increased demand for petroleum products for power generation and the general tightening of markets as the United States ends its SPR oil sales program.
In the current quarter, oil prices have fallen 20%, Bloomberg noted in a report on bank forecasts for its price. The reason, again, had nothing to do with the dynamics of supply and demand. It had a lot to do with central bank policies and specifically the Fed’s aggressive decision to contain inflation through a rapid succession of rate hikes that pushed the dollar much higher, making commodities denominated in the more expensive currency.
On the fundamental front, the G7 is advancing the oil price cap, even though Russia has said it simply won’t sell oil to a country that has a price cap. The EU, for its part, is currently discussing a new set of sanctions against Moscow following the announcement that four regions in eastern Ukraine would hold referendums to join the Russian Federation. Related: OECD: War in Ukraine will hurt global economy more than expected
Meanwhile, OPEC+ remains well below its production targets, and it is likely to continue. Additionally, some analysts expect the cartel to implement more production cuts, further compressing global supply.
In the United States, stocks of the strategic petroleum reserve are at their lowest in decades, which worries some. Others, like Robert Rapier, have pointed out that the SPR is not as vital to the country’s supply as it was decades ago, when the United States relied heavily on oil imports.
What the above suggests is what Aramco’s Nasser warned last week. The oil market is out of balance and supply is tightening as there are few new supplies to compensate for natural depletion, which has been accompanied by other factors such as political instability and US sanctions against the big producers.
At the same time, as the EU tightens sanctions on Russia, gas prices are likely to remain high, leading to what UBS has noted as a factor driving up oil prices: greater demand fuels to be used in electricity generation instead of the even more expensive natural gas.
“The consequence of the drawdown on global inventories is that once demand picks up, the price hike will repeat itself,” Martijn Rats, Morgan Stanley’s global oil strategist, told Bloomberg. “For now, demand has fallen, but the picture of supply hasn’t changed that much; the supply cap is not that far off at all. As soon as demand picks up, we will again have the same price pressures in the market. »
In a nutshell, this is the ultimate reason why oil prices are likely to come back up soon. Supply growth is stagnating as demand is poised to pick up. And depending on the strength of its recovery, we could see much higher oil prices next year.
By Irina Slav for Oilprice.com
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