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5 reasons to estimate that oil prices will rise back to $100 a barrel | Anue Juheng – US Stocks

5 reasons to estimate that oil prices will rise back to $100 a barrel | Anue Juheng – US Stocks
5 reasons to estimate that oil prices will rise back to $100 a barrel | Anue Juheng – US Stocks

Natasha Kaneva, head of commodities strategy at JPMorgan, sees oil prices likely to climb above $100 a barrel by the end of the year, reversing a steady decline in prices that has seen demand plummet since the summer.

Kaneva expects oil prices to rise since hovering in the $80-$90 range over the past few weeks due to a shift in several factors.

Oil prices fell justifiably below $100 in mid-summer after a marked slowdown in the global economy and renewed lockdowns in China due to the coronavirus. However, Kaneva wrote: “While the strength of the global economy remains a concern, supply and demand continue to suggest that the oversupply seen throughout the summer will turn into a deficit starting in October.”

Kaneva’s bullish assessment was questioned on Wall Street, citing a build in crude inventories that showed demand was still too low for a price hike to justify.

Strategists believe that both supply- and demand-related factors could lead to changes in the market.

On the supply side, the U.S. will stop selling the Strategic Petroleum Reserve (SPR) next month. Since April, the U.S. government has sold about 1 million barrels per day of SPR to shore up supplies.

The world uses about 100 million barrels of oil a day, and a lack of supply of that 1 million barrels could have major repercussions, which could lead to shortages.

In addition, Europe will ban the import of Russian crude oil from December, and the supply may fall by another 900,000 barrels per day. Although other countries may import more Russian oil, there will eventually be a ceiling.

Supply growth may also be hindered. For months, the U.S. and Europe seemed to be close to reaching a nuclear deal with Iran, which would allow Iranian oil to flow into the market, but now it seems unlikely that an agreement will be reached and hundreds of thousands of barrels of Iranian oil will not be able to enter the market.

On the demand side, Kaneva expects demand to rise by 1.5 million bpd in the fourth quarter, citing a global recession that is less dire than public fears. She asserted that the European economy is doing better than expected and that China’s oil use will start to increase as China’s coronavirus lockdown eases.

Kaneva cited evidence that oil shipments from the Middle East to China increased significantly in September, a sign of improving Chinese oil demand and implying that Chinese refinery run rates will increase in the fourth quarter.

Also, with gas prices at record highs, demand could also rise if more businesses and consumers switch to oil this winter. Some power plants can replace natural gas with oil, increasing the demand for oil. Kaneva said half of her estimated increase in demand comes from energy switching (ie, switching from natural gas to oil).

For U.S. oil companies, if the price of crude oil rises from $80 to $100, almost the entire flow of profits will be turned into greater interests for shareholders.

The rewards could be especially huge for high-yield companies like Pioneer Natural Resources (PXD-US) and Devon Energy (DVN-US).


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