As per the forecast of J.P. Morgan in a research note which came out on Friday, the prices of Oil are heading for a downturn later this year and will be sinking even lower in 2019 as the fundamentals of supply and demand weaken.
The analyst of J.P.Morgan, Abhishek Deshpande, wrote in a note, “While geopolitical tensions and lingering risks of large supply disruptions remain an upside risk throughout 2H18, we think that prices will be corrected downwards towards end of the year and remain capped in 2019.”
Although according to recent reviews the oil prices are rising to 3½-year highs, the investment bank has left its forecast for international benchmark Brent crude unchanged at $69.30 a barrel.
Brent was trading at just under $77 a barrel, off its recent high of $80.50 as per the reports of Friday.
J.P. Morgan observed that U.S. Texas Intermediate crude is averaging at $62.20 a barrel, down $3 from its last estimate. On Friday, WTI was trading at nearly $66 a barrel after nearly touching $73 a barrel two weeks ago.
The bank has knocked down the Brent forecast for 2019 by $1, to $63 a barrel. It has lowered its outlook for WTI slightly to $58.25 a barrel.
However, the banks say that an OPEC meeting willwbe conducted in two weeks which will determine the short-term price movement. The Oil market of Russia and Saudi Arabia have recently signalled that they could ease a deal between the 14-member OPEC and other producers to limit output, which has been in place since January 2017.
According to J.P.Morgan, The Saudis and Russia are wary of prices rising high enough to dent demand as Venezuela’s output continues to decline amid an economic crisis and as U.S. sanctions come into force against Iran, OPEC’s third-biggest producer. Oil prices suggest the market is betting on an output increase of about 400,000 barrels a day.
Deshpande added saying, “We think there might be one last hurrah (upside) when it comes to prices especially if OPEC were to announce a release of barrels which is less than what markets have priced in currently.”
However, J.P. Morgan stills thinks the rally would unwind. That’s because any move by OPEC to ease output caps would signal a return to pre-2017 production levels. It would also tip the finely balanced oil market towards oversupply starting in the fourth quarter, when the restored barrels are likely to start arriving at import terminals.
The bank expects oil demand to grow more slowly than previously anticipated, which correlates to J.P. Morgan’s downward revisions to economic growth in Europe, Latin America and the Middle East.
On the supply side, global output is poised to rise by 2 million barrels a day in 2018, 200,000 barrels a day higher than J.P. Morgan’s last forecast. Supply from outside OPEC is set to rise by 2.2 million barrels a day, driven by a surge in output from the United States, which is quickly closing in on top producer Russia, which pumps about 11 million barrels a day.
J.P. Morgan does see a path to a higher oil price in 2018 and 2019. In its high-case scenario, Brent averages $74.55 a barrel this year and $78.75 next year. The catalysts for a higher price include OPEC and Russia extending their output limits into 2019 and the wealth of geopolitical risks throughout the market.
As per the analyst, Deshpande, “The risk of oil prices gravitating towards the high case remains high given the rise in geopolitical tensions and potential risk to large scale disruptions to oil supply from key oil producing countries such as Iran and Venezuela in particular.”