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JPMorgan Hikes Brent Forecast To $130 By Q3

Tyler Durden's picture




 

Enjoying WTI at sub $100? Since we have at most two months of WTI trading sub $115 (and Brent at $130, assuming the WTI-Brent spread does not finally collapse) according to JP Morgan, enjoy it while you can. From Lawrence Eagles: "Although oil prices fell sharply last week, on Friday we raised our Brent crude price forecast to $130/bbl for 3Q2011 due to a tight supply/demand outlook. While product cracks and crude differentials also saw some readjustment, we do not expect a major realignment in differentials going forward as the underlying pressures remain intact." In other words, as we said last week, nothing has changed (except for some margins). And since all commodities correlate as one, and since Jim O'Neill was out earlier today bashing commodities (the surest contrarian sign ever), time to load up the boat courtesy of the CME's persistent banging the speculator is likely here.

More from JPM:

Refiners are typically conservative when it comes to selecting crudes. It is not worth risking an outage just to save a few cents a barrel. But given recent sweet/sour differentials there is a major incentive to run sour crude, so many refiners are pushing limits. It is often said that sour crude use is “maxed out” due to sulfur limitations. However, recent visits to key refining clients in Asia indicate that this is not entirely true. Refiners are running as much sour as they readily can, but several said logistical constraints or preference for domestic crude is preventing them from fully maximizing sour crude use. Some pointed to ways they could possibly run more sour crude if the price is right.

It needs to be “right”. Demand is growing seasonally as refiners return from maintenance but sweet crude supply is constrained. Refiners must be incentivized to run additional sour crude from Iraq and others as they ramp-up runs. In 2008, diesel/fuel oil differentials spiked to push refiners to raise runs, but then we had a much tighter refinery sector. In 2011, the critical constraint is crude volume: more crude needs to be run. The incentive must continue to come wide Brent/Urals and Brent/Dubai, especially if OPEC adds the  crude the market needs.

News Flow:

In the US, Mississippi river floodwaters are expected to crest on Tuesday in the city of Memphis. But further south, waters will continue to rise and refineries will be impacted. Tanker traffic is already beingaffected due to flooding of terminals.

A portion of Venezuela’s Amuay refinery experienced a significant power outage on Friday, knocking out the majority of the refinery’s operating units, including a large FCC unit (108 kbd). The Isla refinery in Curacao was also a victim of a blackout, causing full plant shutdown, according to reports.

At the request of the Japanese Prime Minister, Chubu Electric Power Company is reportedly shutting its 3.5 GW Hamaoka nuclear plant. The plant lies adjacent to a fault line and is said to be at risk of damage if a major earthquake hits the area.

Numerous small news points from China drew our interest in advance of oil trade data expected tomorrow: (1) State refiners continue to ration wholesale diesel, but buying interest slowed with the fall in crude prices. Gasoline buying also reportedly slowed. (2) Sinopec is said to “outsource” about 400 kbd of gasoil and 90 kbd from independent refiners in May. Sinopec is reportedly giving a subsidy of about $6/bbl versus $2/bbl a month ago. (3) Chinese independent refiners have reportedly been running more condensate, although the volumes remain small for now at around 12-15 kbd.

Analysis

Even if refineries themselves are not flooded, deliveries of crude and loading of products will be impacted. Runs may be reduced just as US refiners are struggling to return from a period of elevated outages amidst seasonally rising demand. Recent robust US Gulf Coast exports to Latin America may be scaled back as consumers up cracks to keep products for domestic use.

Infrastructure problems continue to be a constraint for Latin America’s oil industry; in addition to unplanned outages for refineries, our crude production forecasts have been lowered in this month’s assessment of 2011 supply from Venezuela. Electricity shortages have been identified as a source of additional demand as consumers utilize oil to meet power needs, and with difficulties operating refining capacity, imports into Latin America from the US should continue.

A number of nuclear reactors around Japan are seeing delayed returns, but as far as we know this is the first proposed long-term shutdown of an operating plant. Public pressure of this type will continue, so it is important to note potential impacts on oil. Chubu electric has about 5 GW of oil-fired capacity, but according to company reports it is used primarily as back-up. Should it close Hanaoka, Chubu will first turn to cheaper LNG before oil. Unlike TEPCO, it can also draw on neighbors as it is on the undamaged 60 hertz western grid. Neighboring utilities including Kansai electric will also push up LNG use before oil Oil use oil. will undoubtedly surge further with peak summer demand, but the impact should be more muted than in eastern Japan.

China is unusual in that a decline in price can lead to a short-term decline in implied demand growth. This is likely due to hoarding at the retail and consumer level in anticipation of administered price increases. The opposite can happen when crude price falls. Essentially, why build stocks when price is likely to be adjusted downwards, or as in this case not adjusted upwards? Retailers/consumers simply put off purchases and drawdown stocks. Just as March and April implied demand was likely boosted by hoarding, if prices remain lower May could see destocking. At the same time, runs at independent refiners could improve due to better refining economics. Taken together, Chinese net product exports could bounce if the international crude price remains relatively low. Condensate will need to find new uses as Middle East supply ramps up faster than splitting capacity. Relatively simple teapot refineries, often running at low utilization, are a natural home for surplus condensate.

And with this down, look for Goldman to formally revise its sell rating on Crude any minute now.

 

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Mon, 05/09/2011 - 09:53 | 1255242 snowball777
snowball777's picture

I read the headline as "Hikes Brent Forecast To $180 By QE3"

Mon, 05/09/2011 - 10:06 | 1255278 the mad hatter
the mad hatter's picture

Why do equities and forex brokers' recommendations get the "do the opposite" treatment on ZH while commodities recommendations get some credibility depending on the outlook?

 

I think GS was trying to get into commodities with the first recommendation to sell crude and now that it dropped 10 percent and the economic outlook looks a lot stormier they want out so they're recommending a buy.

 

slimy bastards.

Mon, 05/09/2011 - 10:16 | 1255309 SheepDog-One
SheepDog-One's picture

Consider its not JUST economic forecasts or conditions, the mid east is blowing up and Iran and Saudis likely involved soon. Imagine an oil price with an Iran/Saudi hot war? $200 very cheap then?

Mon, 05/09/2011 - 11:30 | 1255605 slaughterer
slaughterer's picture

What?  ZH trusts a JPM commodity forecast?  JPM is fading this move right now as they prepare to call their friends at the CME to hike crude spec margins.  Last week's rumor becomes this week's reality.

Mon, 05/09/2011 - 09:57 | 1255245 centerline
centerline's picture

Damn speculators!

Mon, 05/09/2011 - 09:56 | 1255249 TexDenim
TexDenim's picture

Actually, this forecast took some balls and may be correct. Last week was more of a risk off liquidation than a sea change in oil prices. The price of Brent will be very volatile and experience weeks like the last one, but for the next 12 months the supply demand dynamics do favor higher Brent prices (but WTI will lag).

Mon, 05/09/2011 - 10:00 | 1255251 Oh regional Indian
Oh regional Indian's picture

ORI hikes Brent to $160 by Q3. today's dollars. 

In Q3 dollars, it will be more like $1,600. 

By Q4, oil will be a strictly rationed Strategic War Reserve.

Say goodbye to Oillywood, say good bye my de-formed baybee.

ORI

http://aadivaahan.wordpress.com/2011/05/06/movement-water-radioactivity-etc/

Mon, 05/09/2011 - 10:15 | 1255302 Segestan
Segestan's picture

Bond market  Q3 ?

 

Mon, 05/09/2011 - 10:29 | 1255346 Oh regional Indian
Oh regional Indian's picture

You think it'll make it that far Seg? Somewhere the can is going to become too heavy to kick.

I see Bond Bomb Blow definitely by end of Q3. If not before. 

ORI

Mon, 05/09/2011 - 10:41 | 1255393 Segestan
Segestan's picture

I see you being correct.

Mon, 05/09/2011 - 09:57 | 1255253 The Real McCoy
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I think 'strengthening' (or correcting) USD is going to put downward pressure on crude in the short term.

Mon, 05/09/2011 - 10:01 | 1255254 Josh Randall
Josh Randall's picture

Go-Go Juice to the moon, Baby 

Mon, 05/09/2011 - 10:00 | 1255262 Math Man
Math Man's picture

My forecast is unchanged at $90.

 

Mon, 05/09/2011 - 10:04 | 1255263 TruthInSunshine
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BTFD!

(Bang the f**king Dae-Ho)

Mon, 05/09/2011 - 10:04 | 1255267 RobotTrader
RobotTrader's picture

Meanwhile, gold stocks continue to crash and the PM shorts and "Ratio Traders" are making vast fortunes.

Mon, 05/09/2011 - 10:12 | 1255286 firstdivision
firstdivision's picture

Yet physical is up.  Smells like time buy some PHYS and PSLV

Mon, 05/09/2011 - 10:28 | 1255343 SheepDog-One
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MomoFader is the only guy in america who has managed to LOSE on his PM calls over the last year.

Mon, 05/09/2011 - 10:10 | 1255291 tmosley
tmosley's picture

Well, looks like I won that bet. I knew Robo couldn't go more than 12 hours without insulting his betters after suddenly doing a 180 and recommending silver to his pals.

Mon, 05/09/2011 - 10:17 | 1255295 bobby02
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Slightly off topic but what was that $34.43 print in SLV at 12:54?

Mon, 05/09/2011 - 10:20 | 1255315 SheepDog-One
SheepDog-One's picture

Gold $1,505, suck it loser. 

Mon, 05/09/2011 - 10:05 | 1255269 Franken_Stein
Franken_Stein's picture

 

Maybe because they already know, what the rest of the world doesn't know, which is that Iran is going to be attacked soon.

 

All for the sake of this stupid black liquid under the sand.

 

Man, if you Americans would spend only half of what you spend on your private mercenary army on alternative energy, you could be independent of oil imports now.

 

But of course the likes of Halliburton and the Kellogg company or Blackwater/Xe can't make a private buck on that.

 

An army which consumes $680 bn a year has to be put to good use, has it not ?

 

Mon, 05/09/2011 - 10:13 | 1255289 TruthInSunshine
TruthInSunshine's picture

Not that I agree or disagree that Iran is about to be attacked, but is there some credible (credible as in NOT Debka or Sorcha Faal or a tabloid, or worse yet - The New York Times, Wall Street Journal or NBC/Fox/ABC/CBS) source that you're relying on in making this projection?

Mon, 05/09/2011 - 10:16 | 1255308 Vergeltung
Vergeltung's picture

what a tool.

Mon, 05/09/2011 - 10:41 | 1255401 Oh regional Indian
Oh regional Indian's picture

Why Vergel, Iran is clearly in the cross-hairs. Why is he a tool? Curious response.

ORI

Mon, 05/09/2011 - 10:05 | 1255270 Itsalie
Itsalie's picture

So can someone pse explain why JP Morgue is suddenly to be trusted?

Mon, 05/09/2011 - 10:03 | 1255271 wolfsonite
wolfsonite's picture

...

Mon, 05/09/2011 - 10:15 | 1255299 oogs66
oogs66's picture

The move in oil reminded me a lot of the move in yen post intervention.  After the big intervention, the yen weakened, longs got squeezed out, etc, but after the initial wave was done, it slowly ground its way back to where it had been before the intervention.  In spite of all these margin calls, etc, the price of commodities will retrace a lot of their losses, because contrary to the government's opinion that the prices were artificially high, they were real.

Mon, 05/09/2011 - 10:16 | 1255304 tecno242
tecno242's picture

this confuses me.  I thought JPM and .gov were BFF's.

raising oil forecasts is obviously not playing ball with .gov right now.

Mon, 05/09/2011 - 10:23 | 1255324 pragmatic hobo
pragmatic hobo's picture

"raising oil forecasts is obviously not playing ball with .gov right now"

of course it does. What do you think QE2 was all about?

Mon, 05/09/2011 - 10:24 | 1255339 SheepDog-One
SheepDog-One's picture

Calling for higher oil prices is not playing ball with .gov.-

Barrack Hussein Obama- 'My plan means oil prices and energy costs in general will neccessarily have to be far higher'

Mon, 05/09/2011 - 10:22 | 1255333 SheepDog-One
SheepDog-One's picture

People looking for reason and logic in a totaly broken and corrupt world economy...I love it.

Mon, 05/09/2011 - 10:32 | 1255360 Atomizer
Atomizer's picture

Quantitative Sleazing III is a go!

Mon, 05/09/2011 - 11:10 | 1255470 Franken_Stein
Franken_Stein's picture

 

I have a direct front row view on Blankfein's Hymietown apartment.

Twas so easy.

 

15 Central Park West.

 

http://www.earthcam.com/usa/newyork/columbuscircle/

 

Somehow he has to get from there to 200 West Street in his Lincoln Towncar / Ford Escape / Mercedes Maybach with toned windows.

 

Doing God's work and Winning !

 

Have you ever heard of Kissinger Associates ?

http://en.wikipedia.org/wiki/Kissinger_Associates

 

Boy, N.Y.C. seems to be full of these globalist psychopaths.

Kissinger is a regular guest in these Bilderberg group meetings.

 

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