BAKU, Azerbaijan, June 8
By Leman Zeynalova – Trend:
The US JP Morgan Bank has increased its oil price forecasts for the second half of 2020 amid the extension of the OPEC+ deal, Trend reports citing JP Morgan.
“Global demand has been steadily recovering with the easing lockdown measures, largely tracking our assumptions. Since our last price update on May 4, net changes to demand have been minimal—about a 500 kbd downgrade to 1H demand, somewhat offset by a 160 kbd upgrade for 2H. The main change in the outlook comes on the supply side from the one-month rollover of the OPEC+ cuts pulling deficits forward by two months. Accordingly, we raise our 2H20 price forecast on average by $6/bbl. However, our price forecasts are below the forward curve given our 2H20 deficit is averaging 2.0 mbd per month compared to our view that market consensus is currently pricing in a deficit in the range of 4 mbd to 5 mbd,” the bank said in its report.
JP Morgan estimates that the price rally and massive inventory overhang (1.57 billion barrels were added to storage in 1H20) are two challenges for OPEC+, threatening the sustainability of both the price recovery and its market share given US HY E&P debt issuance has resumed.
“OPEC+ has traditionally targeted a reduction in inventory during times of oversupply by using policy spanning multiple months which allowed for better medium-term visibility. However, the shift to a new more calibrated approach of month-by-month market evaluation (and needed production adjustments) signals a notably different approach to inventory management. In essence, OPEC hopes to tighten near-term balances and push spot prices higher than forward prices, encouraging inventory draws. Controlling the shape of the curve is difficult, requiring nuanced inventory management through quick supply adjustments,” said the bank.
However, if successful in achieving sustained backwardation, the benefits for OPEC are twofold, the bank believes.
“Lower prices at the back-end of the curve would discourage hedging, putting higher-cost producers at a disadvantage. At the same time, higher prices at the front-end would simultaneously send strong bullish signals to financial and capital markets as the backwardated curve shape generates positive roll yield,” said JP Morgan.
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