As long as the OPEC put is alive, 2019 should turn out to be another moderate realized volatility year for crude markets even if shale supply steps up in 1H19, the US JP Morgan Bank said in a report obtained by Trend.
The Bank said that 2018 is entering the home stretch with high drama in oil prices, but was an unremarkable year for realized volatility – even more placid than 2017 in some respects.
"As long as the OPEC put is alive, which we see little incentive for the cartel to abandon, 2019 should turn out to be another moderate realized volatility (~25 percent) year for crude markets even if shale supply steps up in 1H19. Risks to the view stem from unpredictability of the US/China trade conflict and a stronger-than-anticipated revival of vol bullish late-cycle dynamics in oil markets," said the report.
The Bank believes that US supply is widely expected to increase early next year, but should only pressure prices moderately in the presence of continued OPEC supply management that JP Morgan sees no incentive for the cartel to abandon.
"If anything, the combination of increased shale barrels and lower demand growth next year as the US cools may well bring down the upper-end of 2019's Brent price range to ~$75 per barrel from $85 per barrel this year in our central scenario, even as $60-$65 per barrel continues to define the zone of OPEC support," said the report.
The net result would be a narrower range on flat price around $70 per barrel that should be acceptable to the Saudis from a demand management standpoint, according to JP Morgan.
"On the whole, as long as the ongoing OPEC regime of careful supply calibration remains in place, the bar for outsized realized volatility swings is high."
"Risks are tilted towards lower prices as likely surprises are US oversupply and Saudi reticence to fully revert its Iran-replacement barrels; also the once-in-a-generation Chinese industrial catch-up demand in the run-up to the 2007 cycle is highly unlikely to repeat as China slows towards 6 percent GDP growth next year," said the report.
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