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31 Mar 2015
Outlook for crude oil prices remains subdued – JP Morgan
FXStreet (Edinburgh) - In the view of analysts at JP Morgan, crude oil prices could still remain subdued into the second quarter.
Key Quotes
“The oil price interacts critically with the Fed outlook through the inflation channel, particularly if a more rapid rise in wages by year-end intersects with trend appreciation in crude prices”.
“We have been forecasting this year that oil markets would move into a bottoming-out phase this spring leading to average prices of around $58/bbl on Brent and $53/bbl on WTI by Q4”.
“This move is coming earlier and more forcefully than we expected due to several developments: production shortfalls in Kuwait and Iraq; a geopolitical premium around Yemen (for Red Sea traffic, not Yemen’s own miniscule production); greater-than-expected cuts to US producers’ capex intentions; and an unprecedented drop in rig count”.
“But measured by actual reductions to the main source of oversupply – the US – the oil market still looks vulnerable due to record and rising production as well as inventories”.
“A P5+1 deal on Iran’s nuclear programme could also add another 300k-500k barrels per day to OPEC output”.
“And while price-based indicators of demand strength like refining margins are encouraging, most top-down indicators of demand show little evidence of a growth upturn outside of the Euro area and its Central European satellites”.
“We know markets are supposed to be present-value calculators so should trade higher on lead indicators of improving market balances – like the eventual supply curbs from fewer rigs and less investment – but it is still difficult to turn bullish enough on oil prices to think they will drive trend appreciation in petro currencies like CAD, NOK or MYR in Q2”.
“So we keep the oil price on the short list of major systemic influences, but without high conviction that it will influence currencies as much in Q2 as it did in Q1”.
Key Quotes
“The oil price interacts critically with the Fed outlook through the inflation channel, particularly if a more rapid rise in wages by year-end intersects with trend appreciation in crude prices”.
“We have been forecasting this year that oil markets would move into a bottoming-out phase this spring leading to average prices of around $58/bbl on Brent and $53/bbl on WTI by Q4”.
“This move is coming earlier and more forcefully than we expected due to several developments: production shortfalls in Kuwait and Iraq; a geopolitical premium around Yemen (for Red Sea traffic, not Yemen’s own miniscule production); greater-than-expected cuts to US producers’ capex intentions; and an unprecedented drop in rig count”.
“But measured by actual reductions to the main source of oversupply – the US – the oil market still looks vulnerable due to record and rising production as well as inventories”.
“A P5+1 deal on Iran’s nuclear programme could also add another 300k-500k barrels per day to OPEC output”.
“And while price-based indicators of demand strength like refining margins are encouraging, most top-down indicators of demand show little evidence of a growth upturn outside of the Euro area and its Central European satellites”.
“We know markets are supposed to be present-value calculators so should trade higher on lead indicators of improving market balances – like the eventual supply curbs from fewer rigs and less investment – but it is still difficult to turn bullish enough on oil prices to think they will drive trend appreciation in petro currencies like CAD, NOK or MYR in Q2”.
“So we keep the oil price on the short list of major systemic influences, but without high conviction that it will influence currencies as much in Q2 as it did in Q1”.