JP Morgan Asks If Oil Prices Are $10 Too Low or $20 Too High

In a research note sent to Rigzone late Thursday by Natasha Kaneva, Head of Global Commodities Strategy at J.P. Morgan, analysts at the company, including Kaneva, asked if oil prices are “$10 too low or $20 too high”.

The analysts highlighted in the note that, during the company’s two weeks of marketing in Europe and Asia, J.P. Morgan “encountered both perspectives”.

“Some clients believe that current oil prices are $10 too low, while others argue they are $20 too high,” the analysts said.

The J.P. Morgan analysts outlined “the bullish argument” and “bear…reasons” in the note. 

“Incoming hard data on the economy has held up so far, and oil demand has been relatively robust,” the analysts said under a subcategory for the former.

“Perspectives are shifting away from concerns about a U.S. recession to optimism about growth-boosting deregulation and tax cuts,” they added.

“Similarly, views on China are evolving. We were surprised by the positive sentiment in China. Chinese copper demand, a reliable indicator of the health of the Chinese economy, increased by 6-7 percent in the first quarter, with sufficient underlying momentum beyond frontloading to sustain growth into the second half of the year,” they continued.

“China has a clear policy direction focused on growth, aiming at proactive expansion of domestic demand,” they went on to state.

Under this subcategory, the analysts also noted that “healthy refinery margins are encouraging high utilization rates and product cracks are strong, yet global product inventories are stubbornly low”.

“Strong demand for crude is reflected in the prompt spreads of both Brent and WTI, which are trading at 58-64c/bbl backwardation,” they added.

Under the bear case subhead included in the note, the analysts said, “despite robust demand so far this year, averaging 1.0 million barrels per day year to date, visible inventories have started to accumulate”.

“Excluding a significant 65 million barrel draw in global visible oil stocks in January, visible oil inventories have increased each month, surging by 157 million barrels through May 16 (1.5 million barrels per day),” they added.

“While China’s economy is likely to achieve near five percent growth this year, the rapid decarbonization the country has undergone over the past four to five years means that this growth is substantially less oil-intensive,” they continued.

“By our estimates, Chinese demand for oil will increase by approximately 200,000 barrels per day this year, but demand for refined products such as gasoline, diesel, and jet fuel will contract by 230,000 barrels per day,” they said.

Under this subcategory, the analysts went on to state that the rapid accumulation of inventories will necessitate a supply response. They added, however, that “the cost structure of the marginal supply – U.S. shale – is at least $10 lower than current price levels”.

The analysts also stated that “OPEC’s supply increases are now visible in the oil export data, as reflected by the widening spread between Brent and Dubai crudes”.

In the note, the J.P. Morgan analysts stated that their views align squarely in the middle.

“Our pricing model estimates Brent’s fair value at $66 for June, with prices expected to remain at this level through the end of the third quarter, before experiencing a slight decline in the final quarter of the year as inventory buildup weighs on prices,” they said.

“The inventory build has already begun, and after missing January, it is now aligned with our 2025-2026 outlook, which predicted that global stocks would build by 1.3 million barrels per day this year,” they added.

Rigzone has contacted the White House, the U.S. Department of Energy, the American Petroleum Institute, the State Council of the People’s Republic of China, and OPEC for comment on J.P. Morgan’s research note. At the time of writing, none of the above have responded to Rigzone.

J.P. Morgan’s research note showed that the company expected the Brent crude oil price to average $67 per barrel in the second quarter, $63 per barrel in the third quarter, $61 per barrel in the fourth quarter, and $66 per barrel overall in 2025.

A report sent to Rigzone last week by the Standard Chartered Bank team showed that Standard Chartered Bank expected the ICE Brent nearby future crude oil price to average $52 per barrel in the third quarter of this year, $65 per barrel in the fourth quarter, and $61 per barrel overall in 2025.

In a BMI report sent to Rigzone by the Fitch Group on May 23, BMI projected that the front month Brent crude price will average $76 per barrel this year.

To contact the author, email andreas.exarheas@rigzone.com