JP Morgan reveals key oil supply risks for 2019

Oil&Gas Materials 30 November 2018 11:06 (UTC +04:00)

Baku, Azerbaijan, Nov.30

By Leman Zeynalova – Trend:

Against a muted backdrop for demand, the US JP Morgan Bank expects oil prices to be capped around $60 per barrel.

The Bank believes that this is due to supply risks stemming from: 1) US Shale, 2) Non-OPEC, non-US productivity gains, and 3) OPEC (+).

“Key risks to our view: 1) deeper than expected OPEC cuts in 2019 and non-renewal of waivers on Iranian production; 2) stronger than expected demand growth; 3) higher decline rates and non-OPEC supply contraction at an accelerating rate over the balance of the decade, as the lack of investment in recent years is converted into a meaningful fall in new field additions,” said a report from JP Morgan.

The Bank believes that the Supply Risk 1 is that OPEC+ fiscal breakevens have fallen to $50-70 per barrel; better placed to move into ‘offense’ on oil policy and market share.

“While we expect OPEC to renew its production framework in 2019, we expect a ‘weak deal’. A return to 100 percent compliance would imply a net cut of 830,000 barrels per day back to 32.5 million barrels per day (from peak production of 33.3 million barrels per day in October). This would not only fall short of expectations (we believe consensus is looking for 1-1.2mb/d cut) but it would ultimately prove to be short-lived.

Moreover, JP Morgan does not expect Russia to reduce output meaningfully.

“A higher pain threshold to withstand lower oil prices drives a greater propensity for OPEC to justify increased volumes. We forecast OPEC to grow production by a net 700kb/d from an average 32.9mb/d in 2018 to 33.6mb/d in 2019. Within that we forecast Saudi Arabia to grow production to 11mb/d in 2019 and 11.5mb/d in 2020,” said the report.

The Supply Risk 2 implies that the US shale will continue to be a relentless source of supply growth as production continues to increase. “The long-term outlook remains strong, supported by production from new sites.”

Supply Risk 3 is the non-OPEC, non-US productivity gains, said the Bank.

“We note the latest correction in oil prices will act as a timely reminder to international oil companies that they need to stay disciplined on capital expenditure and strive for greater bang for each barrel they possess which includes mitigating acceleration in decline dates,” said JP Morgan.


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