JPMorgan Predicts an Energy Supercycle, Anticipates Oil Prices to Rise Above $100

Oil prices have rallied in recent months as crucial oil producers Saudi Arabia and Russia press ahead with production cuts to maintain price stability. Crude oil has surged 30% since its late-June low.

As of press time, Brent crude futures were at $94.75 a barrel at 0055 GMT, and US West Texas Intermediate crude futures were trading at $91.36 according to data from Trading Economics.

JP Morgan's Commodities team predicts world oil demand to increase by 5.5mbd by 2030e, reaching 106.9mbd, with China and India accounting for around 65% of this growth between 2023e and 2030e. Despite growth concerns in China, the actual monthly oil demand and 12-month forward based on US DOE forecasts continue to grow in both economies.

In addition, they anticipate an increase in world oil demand by 5.5mbd by 2030e, reaching 106.9mbd. A global oil market deficit is forecasted in the second half of this decade due to a robust demand outlook and depleting supply sources. Based on their proprietary capex shortfall model stemming from field declines, they project a 1.1mbd deficit in 2025, expected to widen to 7.1mbd in 2030.

JP Morgan analysts have affirmed their long-term $80/bbl Brent price forecast (actual), but they see risks to the upside, with prices potentially reaching around $100/bbl. In addition, JP Morgan's Global Energy Strategy has outlined an optimistic scenario for the near term, with a projected price range of $90-110/bbl in 2024, $100-120/bbl in 2025, and $120-150/bbl in 2026.

To support this, JP Morgan has proposed a method for assessing the relationship between oil prices and the world economy by calculating the oil share of the global economy. This is achieved by multiplying the actual oil price by world oil demand and dividing it by real global GDP.

According to the prediction, the world economy can handle triple-digit nominal oil prices because they remain below peak levels experienced in 2008 and 2011 and below the "demand destruction zone" of oil share in world GDP exceeding 5% (currently around 2.5%).

JP Morgan believes that Brent prices have been upheld by OPEC and member states' voluntary cuts/extensions despite limited improvement in fundamental drivers. They suggest that this partly explains why equities have negatively decoupled to oil and predict that energy equities will outperform.

This is driven by premium yields that are hard to ignore, inflection in the EU Oils revision cycle due to tightening oil markets, EU Oils cash breakevens being materially "in-the-money" compared to a strengthening macro with committed cash cycle neutrality below $50/bbl, and global breakeven comparisons indicating an "all-in" balance point of $75-80/bbl.

OPEC adding production is also a historical positive catalyst for energy equities, hinting at improving underlying demand fundamentals.

Overall, the energy sector could potentially outperform broader equities during periods of decline due to "higher for longer" interest rates as it serves as a macro hedge against risks from rising inflation, interest rates, and geopolitical challenges.

In addition, energy is a preferred sector relative to the broader equities market, should the recession viewpoint materialize. JP Morgan's recent study of energy indices' relative performance since 1990 shows that during "recession years," energy generally outperforms the more comprehensive equity index. For instance, in Europe, energy underperformed only once (-32%) out of 11 such years, while in the US, energy underperformed only three times (-1% in 1990, -23% in 2015, and -14% in 2018). Negative equities performance was often coupled with a sharp decline in Brent prices, except in 1990, where it wasn't the case.

JP Morgan unveiled the 'Supercycle Club,' consisting of 13 equities worldwide. These stocks are deemed best placed across their global energy coverage to outperform in a sustained upcycle scenario.

Here is the list of US stocks among the 13 'Supercycle Club':