Oil prices rebounded strongly in New York on Friday on growing expectations that the Organization of Petroleum Exporting Countries (OPEC) and its allies will not only extend output cuts but possibly even deepen them during their upcoming meeting.
JPMorgan (NYSE:JPM) strategists Christyan Malek, Otar Dgebuadze and Marko Kolanovic expect the OPEC meeting scheduled for November 26 to deliver an extension of existing production cuts.
“However, we don’t rule out a scenario of deepening the cuts by up to a million barrels to pre-emptively clear potential demand weakness in the first half of next year associated with a worse than expected developed markets-led recession,” they wrote in a note.
“Moreover, speculative-led selling remains a key theme driving the volatility,” they said, adding that “it is likely that demand destruction in developed markets is in the back of many investors’ minds”.
Supply deficit by 2024
Despite demand surpassing their optimistic projections, Goldman Sachs (NYSE:GS)' analyst Daan Struyven said oil prices had remained somewhat subdued this year.
“We believe that OPEC will ensure Brent is in a US$80-US$100 range by leveraging its pricing power, with a US$80 floor from the OPEC put and a US$100 ceiling from spare capacity.
“While higher non-OPEC supply or lower GDP are downside risks to prices, we estimate that Brent would remain close to US$80 unless OPEC became less assertive.”
Goldman Sachs projects a moderate daily deficit in oil supply by 2024, driven by strong demand, decelerating US supply growth and prolonged lower OPEC supply.
This scenario is expected to push Brent prices to a peak of US$95 per barrel by August 2024, with an average of US$92 throughout the year.
US oil, or West Texas Intermediate, rose 4% to around US$76 per barrel on Friday, according to Bloomberg data. Similarly, the global benchmark Brent crude saw a rise of 4.3%, surpassing US$80 per barrel.
Robust long-term demand
JPMorgan, too, remains optimistic about oil prices, citing OPEC's enduring pricing influence.
“OPEC’s long-term pricing power remains strong. OPEC’s oil policy is stability, and it will continue to play the role of ‘Central Bank for Energy’ in ensuring the industry can invest in future projects to protect the global economy from tail risks of significantly higher oil and short-term spikes beyond 2025.
“We believe short-term market share sacrifices as a result of larger cuts do not impinge on its ability to ultimately regain share of future demand growth, as the long-term demand forecast remains robust.”
Additionally, JPMorgan foresees potential further production cuts from Saudi Arabia, possibly in collaboration with OPEC+ members, in order to maintain strong intra-group relationships.
Upside risks
ANZ Research, in its strategy note, anticipates crude oil prices to remain volatile but still exceed US$90 per barrel by year-end, with a potential to rise to US$100.
“We continue to see some upside risks to this scenario should geopolitical tensions rise, or the demand backdrop improves.”
ANZ expects both Saudi Arabia and Russia to extend their voluntary output cuts through 2024.