JP Morgan analyst Natasha Kaneva recently pointed out that after the release of higher-than-expected CPI data in the United States last week, people have bet that the December Brent crude oil contract strike price will exceed $100, May call open positions have increased nearly two times.
The recent surge in commodities from grains to metals has also led to bets that crude oil, which is also a commodity, is also expected to surge. After all, although WTI crude oil has recovered a lot from last year’s negative value, but in the case of other commodities are constantly breaking new record highs, the current price of oil is still some distance from the historical highs, but also let some investors believe that oil prices may have room to rise.
But is that really the case? In the absence of major shocks such as war, can oil prices really rise to $100? JPMorgan Chase explored the issue from the perspective of supply and demand fundamentals and the U.S. dollar, and concluded that it is difficult for oil prices to rise to $100.
First, just from a fundamental perspective, JPMorgan notes that changes in crude oil inventories have the most weight in its oil fair value model, and if other variables in the model remain unchanged and oil prices are to reach $100 by the end of this year, crude oil supply and demand would need to tighten by about 4 million barrels per day (i.e., supply would then be much smaller than demand) from the third quarter onwards than currently expected, which is almost impossible.
This is because even without any increase in OPEC+ production, demand would need to average more than 102.6 million bpd in Q3 2021 and grow to 103.6 million bpd in Q4 21 for oil prices to reach $100, and for demand to reach these levels would require a massive reopening of the global economy.
Let’s look at the demand side first. The current recovery in Europe is more optimistic, JPMorgan noted that the continent is known for its long summer vacations along the Mediterranean coast, and this area is about to reopen as summer approaches, but this is not enough to support oil prices to break $100/bbl.
JP Morgan said that even without taking into account the structural reduction in demand for crude oil (including fuel efficiency, the popularity of electric vehicles), the economic reopening on the European side may only generate an additional 460,000 barrels per day of crude oil demand.
Also being on the supply side, the OPEC+ side is raring to go and ready to increase production. Even if Saudi Arabia and Russia still do not increase production, the risk of increased production by members of the OPEC+ organization not bound by the production cut agreement is rising as negotiations on the Iran nuclear deal move forward, and Iran has shown a strong willingness to export. If U.S. sanctions are lifted, it could theoretically allow Iran to boost crude exports to 2.5 million bpd.
So in effect, according to JPMorgan’s own data model, it expects Brent crude prices to end 2021 at just $74/bbl, with an average price of $68/bbl for the year.
Of course, J.P. Morgan points out that in addition to the fundamental aspects, there is another possibility for oil prices to soar to $100, which is the collapse of the U.S. dollar.
According to J.P. Morgan’s calculations, for every 1% fluctuation in the dollar index, Brent crude oil will fluctuate 2.8% in the opposite direction. This means that if the dollar depreciates by 5%, oil prices will break $100. But the probability of that scenario happening in reality is unlikely, and JPMorgan expects the likelihood to be only 15%.
That’s because if the dollar index falls by 5%, global growth forecasts, excluding the U.S., may need to be revised upward by 1.1% in the coming months, while the U.S. growth outlook will not change. Recent data suggest this is unlikely.
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