JPMorgan
The note highlighted that investment in oil production and exploration has decreased in recent years. At the same time, the productivity of wells is decreasing. These same dynamics will only intensify due to the coronavirus which will likely impair demand over the next six months especially as people travel less.
Currently, oil prices have rebounded off low levels due to supply cuts from OPEC and decreased drilling in the shale patch. There's also optimism that demand will continue to strengthen given the "reopening" of economies all over the world. However, this is contingent on the coronavirus not making a comeback.
Oversupply to Deficit
The high oil prices from 2007 to 2014 led to innovation in oil production that enabled oil to be extracted from shale. This has led to increased oil supply and created several adverse effects. One is that the downtrend in oil prices has capped inflation which has led to easier monetary policy and a longer economic cycle. Previous expansions have ended as economic growth led to increased energy demand. At some point, it resulted in inflation which led central banks to raise interest rates. Due to plentiful oil, there haven't been any serious inflationary pressures.
In early-2008, the Federal Reserve's ability to act to avert damage from the burst housing bubble was handcuffed by above-trend inflation. This time, the Fed was able to act early and aggressively, since inflation was not a concern.
Based on JPMorgan's assessment of current oil production trends and demand, it believes that the market is going to move into a deficit in 2022. For the last 6 years, the market has been in oversupply, meaning that any increase in demand can be met with additional supply. In a deficit, prices will have to rise to meet additional demand.
Due to decreased oil exploration and production budgets, the bank expects only five, new fields will begin operating in the next five years. At the same time, each well that is currently producing will produce less or stop producing. Due to the environment and short-term pessimism, global production budgets are at a 20-year low. There's also the possibility that shale drilling and exploration may be curtailed with Democrats in power as current forecasts show from 2021 to 2023.
Conclusion
The short-term forecast for oil is not great. It depends on OPEC maintaining its discipline to not pump more oil, and demand to return to pre-coronavirus levels. However, these factors are contributing to the conditions for the next bull market in oil.
