US shale pumping will see oil prices slide back to $50, JP Morgan analyst predicts

  • Christian Malek, the head of EMEA oil and gas equity research at J.P. Morgan, said that the "breakeven" price — where they just about manage to cover their costs — for OPEC nations and major energy companies would drift back towards $50 a barrel by the end of next year.
  • "Everything is gravitating towards $50 a barrel," he told CNBC Thursday.
  • Oil prices have surged more than 35 percent since the middle of last year, with Brent crude briefly rising above $70 a barrel before slipping back below the psychologically important level on Wednesday.

Efficiency improvements from the world's largest oil-producing firms and countries, alongside the rise of U.S. shale, will see prices slide back to near $50 a barrel, according to research at investment bank J.P. Morgan.

Christian Malek, the head of EMEA oil and gas equity research at J.P. Morgan, said that the "breakeven" price — where they just about manage to cover their costs — for OPEC nations and major energy companies would drift back towards $50 a barrel by the end of next year. He explained this current price was in the mid-$60 a barrel price range, including for nations like Saudi Arabia, Iraq and Kuwait.

However, the bank predicted a "breakeven duel" between the 14-member OPEC organization and big oil companies would soon "drive a vicious cycle for oil prices, with medium-term pricing likely to gravitate to the low-$50s."

"Everything is gravitating towards $50 a barrel," he told CNBC Thursday.

He went onto say that while improved efficiency standards among big oil companies was one of the main deflationary breakeven price pressures, the most disruptive influence was likely to continue to be the relentless rise of U.S. shale growth.

'Don't underestimate' fragility of the oil market

Oil prices have surged more than 35 percent since the middle of last year, with Brent crude briefly rising above $70 a barrel before slipping back below the psychologically important level on Wednesday.

The main price driver has been a supply cut from major oil producing group OPEC and Russia, who started to withhold output in January last year. The production cuts by OPEC and 10 other allied producers, which are scheduled to last throughout 2018, are aimed at clearing a supply overhang and propping up prices.

Workers connecting tubes on the Raven Oil Drilling rig near Watford City N.D.
Ken Cedeno | Corbis | Getty Images
Workers connecting tubes on the Raven Oil Drilling rig near Watford City N.D.

OPEC kingpin Saudi Arabia recruited Russia and other producers to collaborate with the cartel when oil prices crashed from over $100 a barrel in 2014 to below $30 in 2016. Crude has since recovered to nearly $70, but surging U.S. shale output has capped gains.

"Rising U.S. shale output, excessive hedge fund long positions on the futures market, and the uncertain but overdue transitioning of the petro-nations' supply deal all contribute to a fragility of the oil market, which should not be underestimated," Norbert Rucker, head of macro and commodity research at Julius Baer, said in a research note Thursday.

Saudi-Russia pact likely to be a 'paper framework'

Saudi Arabia and Russia are thought to be working on a long-term deal to extend controls over major exporters for decades to come.

The kingdom's crown prince, Mohammad Bin Salman, told Reuters on Monday: "We are working to shift from a year-to-year agreement to a 10-20 year agreement."

While Russia — which is not a member of OPEC — has worked alongside the Middle East-dominated group to curb oil production in recent years, a 10 to 20 year deal between it and Riyadh would be unprecedented.

"I think to see Russia continue with OPEC over the medium term is quite bullish. Our base case would be that you'd find that they sort of agree on an independent framework, work together but ultimately just around a range in production," J.P. Morgan's Malek said.

"History says that OPEC complying with individual quotas has never happened, so I think this framework would arguably be a paper framework," he added.