Brent, the benchmark for more than half of the world’s crude oil, is likely to "overshoot" $125 a barrel next year and $150 in 2023, in large part because Opec's spare capacity is below market expectations and impedes its ability to respond to high oil prices, according to JPMorgan.
Underinvestment in the sector over the past 18 months caused by the coronavirus pandemic has hit the output capacity of many producer countries and their ability to respond to recovering oil demand, America's largest lender said in a report this week.
“For at least the next three to four years, the ability of Opec+ to respond to recovering oil demand is challenged,” Christyan Malek, JPMorgan's head of oil and gas research, and other analysts said in the report.
“Our analysis suggests that apart from a small group of nations with very sound plans, all other countries face risk from factors such as delayed capital investment plans due to the pandemic, tougher geology in new fields, increasingly complex fluid in new reservoirs and natural declines in core assets.”
The bank expects that Opec+’s spare capacity, a closely watched metric that measures the amount of barrels that can swiftly be added to the market, will be about 2 million barrels a day in 2022, which is 43 per cent below consensus estimates of 4.8 million bpd.
It anticipates the group’s total capacity shortfall increasing to 3 million bpd by the first half of 2024.
Leading analysts and industry executives have cited the lack of investments in the oil and gas sector.
Dr Sultan Al Jaber, UAE Minister of Industry and Advanced Technology and group chief executive of Abu Dhabi National Oil Company, recently told the Abu Dhabi International Petroleum Exhibition and Conference the global oil and gas industry requires more than $600 billion of investment annually until 2030.
"After almost a decade of underinvestment in our industry, the world has sleepwalked into a supply crunch. It is time to wake up," Dr Al Jaber said.
Longer-term oil prices of $80 a barrel are likely to be needed to spur the investment required to increase capacity as demand grows, and oil is likely to trade around this price from 2024, JPMorgan said.
Brent is expected to rise to $90 a barrel in 2022 with an upside scenario of $125 a barrel. In 2023, it is forecast to increase to $104 a barrel with the potential to rise to as much as $150 a barrel, the bank said.
Brent is up about 40 per cent year-to-date and trading at $72.20 per barrel. West Texas Intermediate, the gauge which tracks US crude, has gained about 42 per cent since the start of the year and trading at $69.02 a barrel at 1.38pm UAE time on Wednesday.
JPMorgan highlighted the role of Opec+ in balancing oil markets and said the group has “returned to a position of positive leverage which it will defend by keeping inventories low, the market in balance and taking action to support optimal reservoir management through paced volume growth”.
The Opec+ alliance, led by Saudi Arabia and Russia, executed a historic reduction of 9.7 million bpd between May 2020 and July this year but has tapered the supply cuts as demand improved.
Opec+ agreed to increase output by 400,000 bpd in December, despite the pressure from the US to bring on additional supply. It stuck to its earlier agreement to bring a total supply of 2 million bpd back to markets by the end of the year.
“We think Opec+ will slow committed increases in early 2022, and believe the group is unlikely to increase supply unless oil prices are well underpinned, as this secures a balanced market which can tolerate future waves of Covid-related demand shocks,” JPMorgan said.
The policy will also give producer reservoirs "a breather" to improve the resilience of spare capacity, according to the investment bank.
The group is meeting on December 2 to review production levels. The meeting takes place as the Omicron coronavirus variant discovered in South Africa poses a challenge to oil demand growth, with some countries reimposing movement restrictions and suspending flights to contain the spread of the virus.