Baku, Azerbaijan, June 9
By Leman Zeynalova – Trend:
Oil prices will likely be driven lower in the quarters ahead by increases in OPEC+ and US supply, but geopolitical risks remain an important concern, the US JP Morgan bank said in its report.
“OPEC and Russia are now concerned that higher oil prices could damage the fragile recovery in near-term global oil demand growth and are looking at bringing back some of the supply they cut when they meet at the next OPEC meeting on June 22. Markets will likely be volatile in the run up to the meeting and the outcome will decide the initial direction for prices. We expect Saudi Arabia, Iraq, Kuwait, Qatar and the UAE to bring their crude supply back to pre-2016 levels from 4Q18 along with Russia,” said the bank.
The survival of the OPEC-NOPEC deal will likely be challenged given the significant change in OPEC dynamics since the beginning of the year, especially the re-imposition of US sanctions on Iran, according to the analysts.
JP Morgan believes that OPEC members will question the need for the deal now that they have achieved their targeted 5-year average OECD oil inventories.
“Given the decline rates seen in Venezuela and assuming that around 0.56mbd of Iranian oil is gradually taken off the market due to sanctions from 1Q19, we still see OPEC production down in 2018 but rising gradually in 2019,” said the report.
“With such a backdrop, OPEC will be faced with a difficult decision to either bring oil production back or keep it unchanged while global balances weaken due to US shale supply rising more than expected and annual demand growth weakening on the back of both economic and price elasticity impacts, as well as a high base effect. Indeed, given the latest rally and higher-than-anticipated US output in 1Q18, we have increased our expectation for US supply growth in the next 18 months, particularly in 2H19 when new pipelines are due to become available to take crude to the Gulf Coast.”
So if the mentioned OPEC countries and Russia really want to support prices going forward, they would in fact have to keep their production cut agreement in place in addition to a drop in Venezuelan and Iranian output in 2019 for the market to be balanced, according to JP Morgan.
“On the back of all these moving parts, in our base case oil price scenario we maintain our existing forecasts unchanged through 1H19, but revise down those for 2H19. Specifically, our base case projects Brent to average $69.30/bbl in 2018 and $63.00/bbl in 2019.”
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