Story by Andreas Exarheas| RigZone.com |In a report sent to Rigzone late last week, analysts at J.P. Morgan said they now expect the OPEC alliance will likely keep oil production targets unchanged when ministers meet on June 1.
“Building inventories and oil prices below levels needed to fund domestic spending augurs for caution when considering a production increase,” the analysts stated in the report.
“OPEC’s restraint will draw stocks starting from May and through August, which should support prices and steepen backwardation,” they added.
“With fundamentals shifting from easing to strengthening and adjusted for April’s build, our fair-value model screens that Brent should average $88 in May-September, with a peak in September of $92 per barrel,” they continued.
In the report, the analysts noted that in April, both crude and product inventories “built well beyond average seasonality, almost fully reversing the draws in the first quarter and reducing physical tightness”.
“Consequently, Brent oil ended a rocky April almost where it started at $87.86, following a notable 13 percent rally witnessed during the first quarter,” the analysts highlighted.
“Oil prices fell about three percent to a seven-week low on Wednesday [April 30], in what looked like a sudden liquidation trade,” they added.
“Key time spreads weakened and Brent prompt spread, the gap between its two nearest contracts, softened to $0.65 cents backwardation, down from $0.80 backwardation month ago,” they went on to state.
The J.P. Morgan analysts stated in the report that their fundamental view on oil has not changed.
“Brent averaged $89 in April vs our fair value of $86, and May continues to screen at $88, ahead of the OPEC meeting on June 1,” they said.
Unwinding
Analysts highlighted in the J.P. Morgan report that they have been arguing that OPEC should “unwind some (400,000 to 500,000 barrels per day) of the voluntary supply reductions in 2024 for strategic rather than fundamental reasons”.
“The narrative behind our price forecasts since November 2022 has been that global demand growth is great, but growth in non-OPEC supply is even greater, leaving the OPEC alliance having to cut production to balance the market,” they said.
“In 2023, a global demand gain of 1.7 million barrels per day was fully covered by the 2.0 million barrel per day rise in non-OPEC supply, led by a surge in U.S. production. This year, we expect more of the same, with growth from non-OPEC supply matching the 1.5 million barrel per day rise in demand,” they added.
“The main issue for OPEC remains in 2025 when global oil demand growth decelerates to one million barrels per day as most of the post-Covid demand normalization will likely be behind us and decarbonization policies put in place more than a decade ago will likely begin to cut into demand for some products,” they continued.
“Non-OPEC+ supply, however, is set to surge by 1.8 million barrels per day underpinned by large-scale, price-inelastic offshore developments in Brazil, Guyana, Senegal, and Norway,” they went on to note.
“Given our outlook on demand in both 2024 and 2025, we argued that OPEC+ should unwind some of the voluntary reductions in 2024 in order to gain operational flexibility in 2025 when cuts will be needed,” the analysts stated.
The J.P Morgan analysts noted in the report that, “in essence”, their view on demand this year “suggested a healthy market balance that can absorb higher OPEC production, accompanied by a necessary but relatively small negative impact on the price”.
“Otherwise, we argued, OPEC’s massive effective spare capacity, a historic four million barrels per day high at a time of record demand, will make it increasingly difficult to accommodate further large-scale supply reductions across the alliance, given the size of the existing cuts and the limited effect on prices so far,” they warned.
The J.P. Morgan analysts stated in the report that maintaining the cuts through 2024 would also tighten the markets, “exacerbating price volatility and tensions with consumer countries”.
“This is especially pertinent in 2024, when voters in 77 countries, most of them emerging market, and comprising about half of the world’s population, are going to the polls,” they added.
Standard Chartered, SEB
In a separate report sent to Rigzone last week, analysts at Standard Chartered Bank said their balances indicate that OPEC has scope to increase output by over one million barrels per day in Q3 without increasing inventories.
“However, in the absence of a sufficiently powerful immediate market signal ministers might not feel comfortable acting without knowing whether H1 tightening was fully delivered in May and June,” they warned.
“Should the return of some barrels be delayed, we expect the supply deficit to exceed two million barrels per day in August,” they added.
In another report sent to Rigzone last week, Bjarne Schieldrop, the Chief Commodities Analyst at Skandinaviska Enskilda Banken AB (SEB), said oil markets are increasingly gazing towards the OPEC+ meeting in June.
“Our view is that the group will adjust production as needed to gain the oil price it wants, which typically is $85 per barrel or higher,” Schieldrop stated in the report, adding that, “this is probably also the general view in the market”.
OPEC+ Cuts
In late November 2023, several OPEC+ countries announced additional voluntary crude oil production cuts, totaling about 2.0 million barrels per day, aimed at supporting the oil price, analysts at Morningstar DBRS noted in a report sent to Rigzone last week.
“The additional cuts were implemented on January 1, 2024, and remain in effect through the end of June 2024. This includes the extension of Saudi Arabia’s unilateral production cut of one million barrels per day, first implemented in June 2023,” they said,
“However, the current additional voluntary cuts are, as previous OPEC+ cuts were, likely to be only a partial offset to increasing production from the U.S., Canada, Guyana, and Brazil, and other non-OPEC+ countries,” they added.
“Additionally, market reports indicate elevated spare OPEC production capacity, approximately five percent of global liquids supply, which could take some time to normalize and hold back an increase in crude oil prices,” they continued.
To contact the author, email andreas.exarheas@rigzone.com
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