JPM Sees Brent Spiking As High As $130 Unless OPEC Steps In

Tyler Durden's picture

And some more bullish news for inverse consumption from JPM's Lawrence Engles Daily Note On Oil: 'As long as key economies remain on track, and given the tensions still manifest on the supply side, we remain positive on near-term price outlook and expect 2Q2011 Brent crude to average $118/bbl, prices possibly spiking towards $130/bbl, if OPEC fails act in time and raise production." Basically we are no recreating the "goldilocks" economy from late 2007/early 2008 when everyone thought crude at $150 was sustainable. And back then there wasn't quite as much "speculative actions driven by too much liquidity" as noted earlier by Charles Plosser.

Full JPM note:

WTI futures prices made fresh 2 ½ year today, as positive economic data from China and renewed Middle East tensions bolstered prices. In a pattern that has become all too familiar in recent months, foreign governments called for their nationals to leave Yemen ahead of any potential deterioration in the security situation there. Yet despite this and other challenges that beset the world economy, we see continued economic growth supporting oil prices. India, which we expect to increase oil use by nearly 200 kbd this year, should start its 180kbd Bhatinda refinery imminently. Reassuringly, economic growth is being translated into increased demand for crude.

The outlook for growth is not without risks. Japanese economic activity will be materially weaker in the short run, with the World Bank predicting that the recovery effort will take five years. Arguably, a bigger risk is that the world’s manufacturing supply chain experiences shortages, as affected companies seek to recover production after last month’s earthquake, which affects growth. Elsewhere, Chinese growth remains on track, according to data released overnight. The PMI survey registered an increase to 53.4, having softened over the last three months. But the rebound was weaker than expected, suggesting tighter policy measures aimed at controlling inflation could well be having an impact on growth. Nevertheless, Chinese oil demand remains robust, with 1Q2011 up 1.2 mbd on a year earlier. Reports indicate that diesel exports are again under pressure from healthy domestic demand, reversing the earlier recovery from end-2010 tightness. As long as key economies remain on track, and given the tensions still manifest on the supply side, we remain positive on near-term price outlook and expect 2Q2011 Brent crude to average $118/bbl, prices possibly  spiking towards $130/bbl, if OPEC fails act in time and raise production.

With two of its eight refineries (Sendai and Kashima) severely damaged due to the earthquake, JX’s reduction in imports comes as no surprise and confirms our view about lower refinery runs next month. While it has boosted run rates at its Negishi refinery since restarting it last week, the overall crude throughput will still be lower than originally planned. As we note in our Oil Markets Monthly, the effects of the earthquake on Japan’s ability to process crude will linger until 2012.

In our Oil Markets Monthly, we raised our Oil price forecast for 2Q2011 to $118/bbl on the basis of the issues in Libya looking larger and more protracted than our, and the market’s initial expectations. The March manufacturing PMI of China rose from February’s level confirming that growth of manufacturing has picked up, after falling for the past three months.

Another US unemployment number below 9% was an indication that job growth has been sustained in 2011 so far, and positive minor revisions were issued to the figures released in February. Despite some softer economic figures released over the last month in housing, manufacturing activity and consumer confidence, job growth has been able to build upon the gains made so far in 2011. The ISM Manufacturing figures due out at 10 AM EST will provide another data point in the evaluation of the health of the US economy.