J.P. Morgan thinks crude oil could hit $190/barrel by 2025, notes Cattle Drive Capital in an article published by seekingalpha.com. That figure appears in a detailed, 65-page report from J.P. Morgan’s European equity research team, titled “Supercycle on the Horizon.” The report was released on March 3 and received little-to-no media coverage as the COVID-19 pandemic gained momentum and global markets began to crash. During March and April 2020, the Brent future contracts for the next month collapsed to around 20 dollars per barrel and even below this level for a few days in late April. Now, the contract is back over 40 dollars per barrel.
“The combination of the supply and demand side dynamics suggests that the global oil market could move into large and sustained deficits past 2022, reaching an extreme 1.7 mbd by 2025”, writes J.P. Morgan. “Running this scenario through our pricing model suggests these balances would lead to Brent oil prices rising steadily from 2022 onwards, averaging around $80/bbl in 2023, $100/bbl in 2024 and $190/bbl in 2025.”
Experts from Cattle Drive Capital believe this forecast to be “wildly optimistic”; however, the underlying premise is accurate: chronic underinvestment in new conventional supply over the last several years will cause a shortfall in a few years’ time, leading to a significant price spike. Cattle Drive Capital expects this supply shortage will be further exacerbated by the hyperbolic decline profile of US shale, which has served as the primary growth engine for global production in recent years.
This bullish view of J.P. Morgan’s is also predicated on the assumption that oil demand will continue to grow steadily even in a post-COVID-19, increasingly carbon-conscious world, led by India and China. For the time horizon in discussion (out to 2025), experts do not expect any significant cannibalization of oil demand from alternative energy sources, electric vehicles, renewables, etc. There are though, certain downside risks to growth emerging from the pandemic, such as a reduction in the frequency of air travel or an increase in remote working.
The WTI benchmark is also back from the historic negative levels touched on late April (-37 dollars per barrel), at near 40 dollars per barrel, last week.