Christyan Malek, JP Morgan’s head of oil and gas research for EMEA, in an interview with CNN, said, “the reality is the chances of oil going toward $100 at this point are higher than three months ago,”. The claim follows an earlier bullish prediction by the investment bank in March, about oil prices shooting up as high as $190 a barrel in 2025.
Have we seen $100 oil before? Yes. The chart above showed oil nations in some years enjoyed oil at levels above $100. Current fundamentals do not favour $190, which could be overreaching by JP Morgan. Brent Oil has not seen $100 for a barrel since 2014, with $145 the highest point the industry has seen in the last 20 years.
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But how possible could reaching $100 be given how the world has changed. On the demand side, we have a pandemic that could change how the world interacts. This issue might be corrected when a vaccine comes to the fore. Life would surely resume and come back to normal, just a few corrections and adjustments from the travel and tourism sector.
The bane to reaching $100 price levels, is the supply side. The rise of shale oil is the albatross on the neck for bullish prices. Shale oil, which has suffered a downturn of recent, appears to be going through a tough recovery patch. The sector is in dire need of financial support as we have seen a lot of bankruptcies been filed across that industry. This scenario forms the basis for Oil bulls. Sawiris, Holding Chairman and CEO of Orascom Investment told CNBC in an interview last month.
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“I actually believe that in, let’s say, 18 months from now, the oil will hit $100″. He further added, “The shale industry will vanish for at least one year, and restarting is going to be difficult because banks will be very reluctant to finance them back because they know that they’re very vulnerable. He cited that even traditional oil, many of the U.S. facilities have closed.”
Let us analyze what makes JP Morgan so upbeat about prices. Their reason is in one hypothesis, which is the cyclical nature of the industry. This theory presumes that the oil market produces a lot of oil when the demand for it increases. Consequently, supply begins to outstrip demand for various reasons, which would lead to the collapse of prices. The markets in its knee-jerk manner, especially from the OPEC oil cartel, would cut production to limit supply and props up higher prices. Classic economics point out that less supply with increased demand leads to high prices. This cycle is evident in the oil markets, hence the rise and fall of prices, as seen in the charts.
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But one thing JP Morgan overlooked would be the continuous rise of renewable energy. The growth of renewable energy has underestimated despite European countries working on transiting to this new form of energy. Bullish Oil prices might suffer a huge setback. Nigeria would want a $100 price for the commodity to happen. The economy needs it as diversification seems to be lagging. But our policymakers might have to wait for all fundamentals to make this happen.
