The oil futures can shake off a stunning Black Friday plunge and then some, testing $125 a barrel next year and overshooting to $150 in 2023 with OPEC firmly in the driver's seat, according to analysts at J.P. Morgan.
The OPEC, the combined of the Organization of the Petroleum Exporting Countries and other major producers, including Russia, has returned to a position of positive leverage, which it will defend by keeping inventories low, the market in balance and taking action to support optimal reservoir management through paced volume growth, the analysts said in a Monday note.
West Texas Intermediate crude CL 00, the U.S. benchmark, plunged 13% on Friday, while Brent crude crude BRN 00 dropped more than 10% in the biggest one-day rout since the early days of the epidemic. The discovery of the omicron variant of the coronaviruses that causes COVID 19 sparked a plunge in stocks and commodities, which were worsened by thin holiday trading conditions on the day after Thanksgiving.
See: The omicron strain of the coronavirus is spreading, now in at least 12 countries.
The uncertainty surrounding the variant and the accompanying plunge in crude gave OPEC economic cover to pause a timetable that has seen it boost output in monthly increments of 400,000 barrels a day without being tied to the U.S.-leaved release of crude from global strategic reserves. Crude took a back portion of Friday's plunge, with U.S. benchmark West Texas Intermediate CL 00, up 4.2% at $70.92 a barrel and global benchmark Brent BRN 00 rising 3.5% to $74.11.
Read: OPEC has excuse to pause oil production increases after COVID variant sparks crude plunge.
The analysts wrote that OPEC is unlikely to increase supply unless oil prices are well underpinned, and that it is likely to slow the pace of production increases early next year.
When the expected pause is over, industrywide underinvestment will make it hard for OPEC to deliver monthly production growth of more than 250,000 barrels a day, according to analysts. They estimate that true OPEC spare capacity will be around 2 million barrels a day, or 43%, less than consensus estimates of 4.8 million barrels a day.
J.P. Morgan's bottom-up, field-by- field model showed a shortfall of 3 million barrels a day mbd compared to an OPEC target of 49.1 mbd in the first half of 2024.
OPEC's ability to control the price depends on the efficacy of its spare capacity, which at the prevailing quotas is set to fall to a 25 year low of 4% of total capacity from an average of 14% seen between 1995 and 2020, according to J.P. Morgan. That is well below the comfort level of around 10% urged by energy consumers.
Incorporating our model of the OPEC true capacity, we expect oil to overshoot the analysts wrote.