A recent report from J.P.Morgan Global Research highlights the firm’s belief that crude oil prices have finally bottomed, and the long-term direction is up. It is, however, likely to take a while for the market to turn. JPM analysts John Normand and colleagues say don’t expect oil prices to get anywhere near $100 a barrel in the next couple of years.
Normand and team offer a succinct quarter-by-quarter forecast for crude oil prices in 2015. “Falling rig count does not translate immediately into lower crude production, tighter market balances and higher prices. Expect another dip in oil this quarter, resulting in average Brent prices of $42/bbl in Q1, followed by $43 in Q2, $52 in Q3 and $58 in Q4.”
Not your usual oil price crash
This is not your father’s or grandfather’s oil price crash. The consensus by both analysts and policymakers was that a halving of crude oil prices would be a net positive for the global economy, especially given the reasons for the crash are more supply than demand-driven. However, since oil prices began to plummet in mid-2014, neither the economic nor financial market consequences have come about quite as expected.
The JPM report notes that consensus economic growth forecasts have been consistently moving lower rather than higher. Inflation, which was already low to nonexistant last year for more than 50% of the countries covered by J.P. Morgan Economics, dropped so much it prompted earlier-than-expected easing in several countries (BoJ QQE2, ECB full-bore QE and surprise rate cuts in Norway, Canada, Australia, India and Singapore).
Oil prices: Energy subsectors in credit and equity
Normand et al. are less than sanguine regarding the energy sub-sectors within credit and equity. The JPM analysts argue it is still too early in the oil price cycle to be taking a substantial position. They note: “In credit, implied default probabilities of 30-50% cumulatively appear excessive, but we think it’s too early in the oil price cycle to favor these names. In equities, integrated producers should continue to see dividends pressured while the E&P sector faces ongoing consolidation due to lack of capital market access. The oilfield services sector will probably witness further EPS downgrades due to a double dip in capex, which will put further downward pressure on trough cycle multiples.”