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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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JP Morgan Slashes Its 2018 Oil Price Forecast By $11

Oil Barrels

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.

Related: The World’s Top Oil Consumers

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.

Related: The Dark Side Of The Oil Tech Boom

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.

By Tsvetana Paraskova for Oilprice.com

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  • John Scior on June 07 2017 said:
    It seems someone at JP Morgan is reading my analysis on Tom Kool's article titled "Oil Prices Set To Rise On Back Of OPEC Deal Extension" where I predicted May 16th a price year end around 40-43 , with the caveat that Venezuela stays together as a state oil exporting nation. ALso FED's telegraphing rate increases. Hmmmmmmmmmmm ??? Makes one scratch their head.
  • zorro6204 on June 07 2017 said:
    I thought at the time Opec was shooting itself in the foot, throwing US shale a lifeline to allow it to hedge forward. If they had let the new production from Iran, Libya and others further flood the market and crash oil prices into the $30's for a prolonged period, they might have had a chance to do real damage to shale during the subsequent borrowing base redeterminations, and further interrupt the supply infrastructure, ruining companies like sand suppliers, only one or two of which would have been capable of surviving.

    Now, they're dead, they allowed the tap to be turned on and gave US companies breathing room to get even better at drilling and recovery, insuring production will be so high that oil prices can't rise for years (if ever). I'm not sure flooding the market would have worked in the long run anyway, but throwing away two years of pain, and some gain, that was just stupid.
  • Cryptic Nomad on June 07 2017 said:
    Every time I read a new article stating that oil inventories will get lower, I just laugh and shrug it off. This will never happen since US shale production is at a momentum and filling the gap left by OPEC. Keep adding oil cuts OPEC and US shale will fill up those cavity happily.
  • DK on June 08 2017 said:
    OPEC's Venus Fly Trap: Cut production by enough quota to allow U.S. companies to receive cash flows and create investment opportunities. As soon as companies are extended to a vulnerable level; flood the market with maximum capacity production and send these American fools down a one way street to bankruptcy.
  • Naomi on June 10 2017 said:
    US banks will finance enough drilling to pay interest on the loans. The lower the price of oil the more holes they drill. The lower the price of oil the greater USA economic activity and the more likely President Trump is reelected. $25/bbl looks good. When China implodes then $15/bbl. When USA attacks North Korea then a bump up to $20/bbl. War/aggression by any OPEC nation would have a punitive effect on the price of oil. Like $10/bbl.

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