OPEC’s “Genius Move” Will Send Oil Much Higher As JPMorgan Sees Surge To $150

Given the wall of worries that had crushed sentiment over the past week, this decision initially weighed on prices, with Brent trading as low as $66/bbl, the lowest price since August 23 before bouncing higher.

Why the rebound? Well, according to Goldman’s in house commodity guru Damien Courvalin, the rebound in prices to $69/bbl, flat on the day, reflects several things, first that the OPEC meeting is still technically not concluded: while the press release stated the decision to hike, it specified that “the meeting remains in session”, allowing for “immediate adjustment”. Second, according to Goldman it suggests that we have indeed approached the point of capitulation, “as a one month 0.4 mb/d OPEC increase in production represents a $1.5/bbl decline in prices on our fundamental modeling.” And with OPEC leaning into the near-term weak sentiment but, in doing so exacerbating the long-term deficit, and with prices far overshooting fundamental risks (as Goldman also discussed in recent days), the bank believes current price levels offer compelling opportunities to reposition for the ongoing structural bull market.

As Goldman’s Courvalin further notes, while OPEC’s decision to ramp-up supplies stands in the face of the group’s oft reiterated caution over the past year, there are four reasons behind today’s outcome.

1. First, while not reflective of a price war, today’s decision is nonetheless consistent with past decisions to add supply in a weaker demand environment.
2. Second, it assuages tensions with the US administration that arose last month when prices reached 8-years high and led to the coordinated SPR release.
3. Third, the lower prices that are now likely to persist in coming weeks may reduce the urgency in coming to a deal with Iran, which would have provided additional barrels to help cope with a tight oil market.
4. Fourth, the lower prices will likely lead US E&Ps to adopt cautious spending plans for 2022, reversing the historical pattern of OPEC delivering bullish supplies at their December meetings that emboldened US producers in their aggressive growth plans.

Meanwhile, extending on the bank’s recent analysis, Courvalin says that mapping the recent $14/bbl post-SPR sell-off into fundamentals means that “the market has significantly overshot, pricing a net 7 mb/d hit to net demand over the next three months, well beyond the possible impact of the latest Covid variant which so far is mostly on jet demand which had only increased by 1 mb/d from last winter’s pre-vaccination level.”

In fact, Goldman argues, today’s OPEC decision reinforces the structural nature of the current bull market. Slower shale production growth will come at the cost of a faster normalization in OPEC spare capacity, which would turn particularly bullish if no deal with Iran is agreed to in 2022. Second, a slow shale response will further lead to capacity erosion in services, requiring even higher oil prices to drive the eventual required ramp-up in activity.

As a result, Goldman views today’s decision as supportive of the bank’s medium-term – and supply driven – forecast for sharply higher prices, “with now very clear upside risks to our 2023 $85/bbl Brent forecast, an outcome not lost on OPEC.” This also reinforces the bank’s view that the recent SPR release, the trigger to the current sell-off will likely end up being a policy mistake.

Of course, in this world few care about the medium term, and instead skeptical bulls will pound the table on the short-term drop in oil prices.

Addressing these concerns, Courvalin writes that in the short term, information on the virulence of the latest variant will be required for oil prices to start recovering. And in the absence of investor appetite to add risk into year-end, it will then take evidence of a tight physical market to likely return above $80/bbl. This is still his base case expectation and in fact, the resumption in gas-to-oil power substitution currently may end up helping offset the hit to international travel given our estimate that it had added 1 mb/d to demand in October, with the market still in deficit this very day and global inventories near a decade low.

The assessment from oil consultancy Energy Aspects was even more glowing, with Chief Oil Analyst Amrita Sen telling Bloomberg TV that  OPEC+ pulled off a “genius move” at their latest meeting, because “by keeping the meeting open throughout the month, the group can adjust its output if demand falls, effectively putting a floor under prices” adding that “you’re not going to be brave enough to sell against that.”

As note above, Sen was referring to the agreement to to proceed with OPEC+ next oil-production hike, but with the caveat that the organization could revisit the decision at any moment.

“It was a pretty impressive move. The pause was the most logical outcome. Given all the uncertainty over the virus, it made sense. But the genius move was keeping this meeting open. It’s probably going to be the longest meeting ever.”

Sen says OPEC+ couldn’t have increased output by more than 400k b/d due to uncertainty over demand. However, conversations on supply among members remain ongoing. “I wouldn’t be surprised if they do that (pause output hikes) in January”

As such, Energy Aspects maintains its Brent forecasts of $100/bbl for 2023 and $85/bbl for next year.

An even more bullish view was presented by JPMorgan oil and gas research head Christyan Malek, who now sees oil climbing as high as $150 a barrel.

“Shale is in a straitjacket,” said Malek of JPMorgan. “When has spare capacity been in the single-digits as a percentage of total capacity. That’s when the risk premium shoots up.”

JPMorgan sees oil climbing as high as $150 a barrel. "Shale is in a straitjacket," says Christyan Malek of JPMorgan. "When has spare capacity been in the single-digits as a percentage of total capacity. That's when the risk premium shoots up"@ferrotv @tomkeene @lisaabramowicz1 pic.twitter.com/hhgiY04Lec

— BSurveillance (@bsurveillance) December 2, 2021