Q1 Crude Prices Up 7.5%, but JP Morgan Sees a Slide Back to $50/bbl

by Ship & Bunker News Team
Thursday March 29, 2018

Predictable is one way to describe analytical comment following Thursday's crude trading session, which saw West Texas Intermediate settle a respectable 56 cents to $64.94 per barrel (for a first quarter 2018 gain of about 7.5 percent) and Brent rise by 57 cents to $69.33 per barrel - the gains attributed to a continued rally of the equity markets and the U.S. dollar up about 0.04 percent against a basket of currencies.

Also supporting prices was continued faith in the efficacy of the Organization of the Petroleum Exporting Countries (OPEC) maintaining its crude production cuts for the rest of this year and possibly next, which pundits view as a buffer to ever-increasing production from the U.S.

But the widespread consensus is that the U.S. activity has nonetheless capped gains in crude prices, and even though the latest Baker Hughes data shows that drillers cut six oil rigs in the week to March 29, bringing the total count down to 798 (the first cut in three weeks), more attention was paid to Energy Information Administration data showing that commercial U.S. stocks rose by 1.6 million barrels in the last week to 429.95 million barrels, while output hit a record 10.43 million barrels per day.

Unsurprisingly, Christian Malek, the head of EMEA oil and gas equity research at J.P. Morgan, told CNBC that U.S. shale pumping will result in a price slide back to $50 by the end of next year: "Everything is gravitating towards $50 a barrel," he said.

Of a similar mindset was Norbert Rucker, head of macro and commodity research at Julius Baer, who said in a research note that "Rising U.S. shale output, excessive hedge fund long positions on the futures market, and the uncertain but overdue transitioning of the petro-nations' supply deal all contribute to a fragility of the oil market, which should not be underestimated."

For the record, Malik was also pessimistic about the much ballyhooed liaison between OPEC and Russia, which the Saudis are hoping will develop into a 10-20 year partnership to monitor oil production.

He remarked, "I think to see Russia continue with OPEC over the medium term is quite bullish; our base case would be that you'd find that they sort of agree on an independent framework, work together but ultimately just around a range in production.

"History says that OPEC complying with individual quotas has never happened, so I think this framework would arguably be a paper framework."

It seems the concerns of the crude market now swing wildly and almost daily: earlier this week the media focus was on an excessive tightening of global inventories, due to the possibility of U.S. president Donald Trump scrapping the Iran nuclear deal, which theoretically may result in a significant portion of crude from the Islamic republic being taken off the market.