An oil price of between $60 and $70 per barrel is both a "sweet spot" and "pain threshold" that rival oil producers in the U.S. and OPEC can tolerate when it comes to the price of oil and production, according to the head of EMEA Oil & Gas Research at JPMorgan.
"$60-70 is the pain threshold that works both for the U.S. (and OPEC)" JPMorgan's Christyan Malek told CNBC on Monday.
"Above $65 and you saw oil being released from (the U.S.') strategic (oil) reserves and we saw tweets from Trump (criticizing OPEC's production cuts). Equally, $65 to $70 is a level where Saudi and OPEC can manage in the context of their fiscal oil break-even (price per barrel). They'd ideally like higher but it does feel like the sweet spot," he said.
Brent crude futures are trading at $67.26 Monday and West Texas Intermediate (WTI) is trade at $58.46. Malek said that the trouble with cutting production -- and the corresponding rise in oil prices -- is that it encouraged more output from U.S. shale producers as the price per barrel becomes more attractive.
More production from U.S. shale producers could affect supply and demand dynamics, putting downward pressure on oil prices if supply outweighs demand.
"The issue, however, is that at that (price) level you are seeing more U.S. shale production, more non-OPEC non-U.S. production, meaning that what you could end up seeing is a transient period of tightness but just a continuation of this oversupply that continues to recur over the next 6-12 months so you never actually see a tight market."
Staying the course
Oil markets have been digesting the latest comments from Saudi Arabia's Energy Minister Khalid Al-Falih this weekend after the 'OPEC+' group of OPEC and non-OPEC producers met in Baku, Azerbaijan.
Al-Falih said on Sunday that the 14-member OPEC and its allied 11 non-OPEC producers, led by Russia, will "stay the course" in terms of their strategic cut to production to balance supply and demand dynamics and stabilize oil prices.
He said he was optimistic" about the prospect of continued commitment to the OPEC-led production cuts and reiterated that position on Monday.
"What guides me in this group of 25 producing countries (the OPEC-plus group) is the level of inventories, and as long as the inventories are rising and are far from normal levels, we will stay the course of guiding the market toward balance. I think that's what consumers and producers around the world want from us," Al-Falih told reporters in Azerbaijan.
The current arrangement sees OPEC (except for sanction-hit Venezuela and Iran, and turbulent Libya) and non-OPEC producers (bar the U.S.) cutting production by 1.2 million barrels per day and is due to last until June 2019.
"We're in a position now where they're (OPEC+ is) looking towards Iran, looking towards U.S. policy to see what the next stops are. Our base case scenario at JPMorgan is that we see cuts going on into the second-half of this year," he said.
He said Saudi Arabia wanted to "protect the price around $70 and therefore we don't see that changing even in the context of U.S. production moving higher. They're going to stay the course and we think they're going to follow-through into the second-half of the year."