Oil production cuts by Russia and the Organization of the Petroleum Exporting Countries (OPEC) have helped push Brent crude prices up some 10% over the past month to roughly $93 per barrel. Christyan Malek, JPMorgan’s head of EMEA energy equity research, fears it’s just the beginning of an era of higher prices.
“Put your seatbelts on. It’s going to be a very volatile supercycle,” the energy guru told Bloomberg Friday when discussing what to expect next for the oil market.
Malek, like a growing number of his peers on Wall Street, believes that a lack of investment in new oil production, coupled with production cuts from OPEC and other top oil producers, will lead to higher crude prices for years to come.
“The flow of capital into new oil supply is just not what it was like in the last 30 years,” he said. “So what that’s doing is driving the long-term price, the back end of the curve, up to $80, or north of $80. We think it probably normalizes around $100.”
Although a major psychological milestone, $100 oil isn't what it used to be because of inflation. A barrel that today costs $100 is the equivalent, in real dollars, to a $71 barrel in 2010 and a $56 barrel in 2000.
Malek noted that for decades oil producers benefited from low borrowing costs, but with the Federal Reserve and many other central banks worldwide raising interest rates to fight inflation, it’s now far more costly to finance new oil production projects. “You need at least $80 [per barrel] to invest in marginal new oil [production],” he explained. “We call it the cash break-even.”
Despite U.S. and European recession fears, which would normally lead oil prices to fall as investors anticipate fading consumer demand, crude oil prices have surged in 2023 due to this lack of new oil production as well as production cuts from the world’s largest producers.
The 13 member nations of OPEC, which produce roughly 80% of all crude, are now producing less oil than at any time since August 2021. Saudi Arabia and Russia also both decided this summer to cut their oil production by 1 million and 300,000 barrels per day, respectively, through the end of the year. And on Thursday, Russian officials enacted a temporary ban on exports of gasoline and diesel to all countries outside of four ex-Soviet states in an attempt to stabilize their domestic fuel market.
The good news, according to Malek, is that although oil prices might rise to $100 per barrel, it’s unlikely they will soar much higher than that because OPEC isn’t willing to miss out on sales due to fading demand. When oil prices surge too far, too fast, consumers and businesses are eventually unable to keep up with the rising costs, leading to a reduction in demand for the product.
“They [OPEC] have a sort of fiduciary duty to make sure they’re stabilizing the price [of oil],” Malek explained. “I think what they’re trying to do is make sure it stays within a range. So by definition, if we see a very cold winter or hurricanes and prices spike very quickly, they’ll be managing the upside just the way they’re managing the downside.”
Still, Malek isn’t the only energy expert on Wall Street who’s concerned about rising oil prices. Goldman Sachs’ commodities strategists are also expecting crude prices to surge to $100 per barrel.
Analysts led by head of oil research Daan Struyven argued in a Sept. 20 note that strong demand from Asia and continued supply cuts from OPEC will ultimately keep prices elevated next year as well. However, echoing Malek’s comments, Struyven and his team said that “OPEC is unlikely to push prices to extreme levels, which would destroy its long-term residual demand.”
“We believe that OPEC will be able to sustain Brent in an $80-to-$105 range in 2024,” they wrote, referencing the international benchmark for crude.
Francisco Blanch, Bank of America’s head of global commodities, also believes oil prices are set to rise—and for similar reasons to Struyven and Malek.
“Should OPEC+ maintain the ongoing supply cuts through year-end against Asia’s positive demand backdrop, we now believe Brent prices could spike past $100 [per barrel] before 2024,” Blanch wrote in a Sept. 12 note to clients.
Demand for oil out of China has been particularly strong, according to Blanch, despite the country’s economic woes. China’s overall exports are falling as it copes with a slower than expected post-pandemic recovery, shifting global supply chains, a property crisis, and sky-high youth unemployment. But its energy imports are actually rising as the nation attempts to shift to a more consumer-driven economic model.
“China has continued to build oil inventories for months to match its increasing import dependency,” Blanch explained. “Asia is leading once again global energy demand growth despite concerns about China’s economic outlook.”
