Global oil demand remains at historic lows as inventory vastly outpaces storage, but JPMorgan analysts think the worst of the commodity-market carnage is over, according to a report from Markets Insider.
The coronavirus pandemic and the ignition of a price war helped push oil futures below $0 for the first time on April 20. Producers worked to curb supply and lift prices, and after weeks of emergency action, inventories are finally turning toward recovery.
Markets Insider said the bank’s analysts expect demand to bounce back over the next two to three months and shift oil surpluses to deficits in the second half of the year.
“While there is still a massive glut of oil that will need to be cleared before there can be any meaningful recovery in prices, we believe that the global oil market is tentatively entering an inflection phase, where rebalancing has started,” the team led by Joyce Chang wrote Thursday.
Oil’s recent price moves lend credence to the analysts’ thesis. West Texas Intermediate crude has more than doubled from its late-April lows, and Brent crude has enjoyed a moderate rally in recent sessions.
Even if the oil market turns for the better, the coronavirus’ fallout will create lasting scars, JPMorgan said. Demand won’t reach pre-outbreak levels until November 2021, and the risk to own oil and gas assets “has likely been permanently elevated” due to greater uncertainty around supply and demand dynamics.
JPMorgan recommends defensive oil stocks for the near-term as months of market rebalancing is poised to fuel strong volatility. Natural gas has emerged as the bank’s “obvious winner,” while oil exploration and production businesses are “largely uninvestable” until oil prices match the cost of shale discovery.
WTI crude traded as much as 11% higher on Thursday to $26.74 per barrel. Brent crude jumped as much as 7% to $31.84 per barrel.
According to the Markets Insider report, both contracts will trade at roughly $34 per barrel by the end of 2020, the analysts projected, before Brent crude climbs to $37 per barrel the following year.