JPMorgan strategists dismissed concerns about the so-called ‘taper tantrum’ in the oil market, saying fear is ‘unnecessary’.
The first alarm in the market was caused by OPEC+’s announcement to restore oil supply to the market later this year. However, in their note, JPMorgan strategists point out that many key OPEC producers are already operating above their allocated quotas.
In May, OPEC produced an average of 35.6 million barrels per day, about 1.7 million barrels per day, about 1.7 million barrels per day above last year’s production targets. This overproduction was consistent, with the alliance exceeding agreed limits by 1.5 million per day in the first five months of the year, “underscoring the difficulties in getting members to fulfill their share commitments,” strategists noted.
“Looking at shipping data, the producer group is also exporting more oil than in the second half of 2023, according to Kpler data,” she added.
The report also notes that while OPEC+ plans to implement 2.2 million per day in voluntary cuts starting in October, market conditions will dictate actual implementation. This, combined with the group’s decision to increase production quotas for the UAE, Russia and Nigeria, led to a planned net increase of 2.5 million barrels per day for the coming year.
Despite these plans, JP Morgan notes that the likelihood of substantial returns in 2025 is “unlikely,” due to weaker market equilibria and an expected decline into the mid-60s.
In addition, many OPEC members are already operating at or near full capacity. Only Saudi Arabia, Russia and the UAE have significant spare capacity, with Saudi Arabia holding 55% of OPEC’s current spare capacity, followed by the UAE with 19% and Russia with 14%.
“We believe that 2024 is not the year to focus on market share and assume that both Saudi Arabia and Russia would be willing to roll over their 9.0 million barrels per day quota until the end of this year, if demand would not be strong enough to absorb the barrels. ‘, said the JPMorgan team.
On the demand side, the bank maintains a healthy outlook. Oil demand grew by 1.3 million barrels per day in the first quarter of 2024, underperforming JPMorgan estimates by 600 kbps, “almost entirely due to a warm winter.”
Looking ahead, strategists expect an inventory decline of 1.1 million per day in the third quarter and a substantial decline in global liquid inventories of 2.0 million per day in August, driven by seasonal demand and price-sensitive Chinese buyers taking advantage of lower prices.
The psychological impact of OPEC’s intention to increase supply cannot be ignored, but the report suggests that actual market fundamentals will drive prices. Historically, inventory levels have been a key driver of oil prices, and the expected inventory decline this summer “should be enough to push Brent back into the high $80-$90 range by September,” the Wall Street giant noted.
In 2025, the outlook becomes more bearish. Non-OPEC supply is expected to rise by 1.8 million per day, driven by large-scale offshore developments. Combined with a slowdown in global oil demand to 1 million per day, the market is likely to fall into a surplus, putting pressure on OPEC+ to further cut production to control the market.
“Our price outlook expects Brent to average $75 in 2025, down sharply from $83 in 2024, with prices ending the year at $64,” the strategists said.
