Market Heading for All Out Production War, but Status Quo for the Meantime May be Maintained

JPMorgan predicts oil prices heading back to the $50s.

Growing uncertainty over the prospect of the Organization of the Petroleum Exporting Countries (OPEC) boosting output caused U.S. crude on Monday to climb a modest 36 cents, but while the cartel and other near-term matters occupied the minds of most resource analysts, Christyan Malek,  the head of  oil and gas research in Emea for J.P. Morgan, offered a possible long-term scenario - one in which so-called `Big Oil' and OPEC engage in an all-out battle for market share.

Writing in the Financial Times, Malek stated that the impetus for what he describes as an impending "battle royale" is the acknowledgement by both parties that there will eventually be a cap on crude demand due to energy transition.

He wrote, "the leaders of GCC countries are unlikely to relapse into the previous patterns of behaviour that a rally in oil prices normal provokes; instead, they are likely to soon return to monetising their oil reserves while demand growth is still strong, [and] that means putting higher volumes into the market and reigniting the fight for market share.

"Meanwhile, international oil companies are alive to the risks, and are looking to get greater bang for each barrel they possess."

Malek went on to note that technological advances will enable producers to lower their all-important break-even prices and earn a 15 percent cash return on the barrels they produce.

Although he didn't state when, Malek wrote that "our analysis suggests a return in prices to the low $50s once Opec, shale producers, and major international oil companies start to fight for a greater share of the world's oil demand."

But for the meantime, it seems that expected and feared increased output from OPEC is something that will be delayed in favour of further supporting current prices - as well as the overall stability of supply and demand.

Andrew Lipow, president of Lipow and Associates, said, "Last week, we saw some news stories indicating that the Trump administration had asked OPEC to increase oil production, but the week went out and we saw those stories walk back; and now we're seeing a number of OPEC producers who are in favor of the status quo."

Indeed, Jabar al-Luaibi, oil minister for Iraq, told media that producers "should not over-exaggerate" the market's need for more supplies, and he added that his country will look at whether to increase output if OPEC decides to lift production at a meeting in Vienna on June 22.

Even though it's no secret that OPEC members are divided on alleviating their production restrictions in order to offset a perceived market tightening due to plummeting output from members such as Venezuela, the minister's unsurprising comments were enough to cause West Texas Intermediate to settle up 36 cents to $66.10;  Brent rose 3 cents to $76.49 per barrel.

But as always, OPEC's new-found reputation for production restraint isn't entirely what it seems, given the numerous instances of members cheating on their monthly quotas or outright refusing to go along with cutbacks.

The latest demonstration that OPEC could, if given the right circumstances, easily fulfill Christyan Malek's forecast, came Monday from a source in Saudi Arabia, who reported that the kingdom raised oil output to a little more than 10 million barrels per day (bpd) in May, even though that number was still below its quota.

Last week, J.P. Morgan worried that supply-and-demand fundamentals are due to weaken due partly to voluminous U.S. output, but it stated that Brent prices could still climb to $78.75 next year if, among other things, OPEC and Russia extend their production cuts into 2019.