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'Don't get used to it': OPEC's free pass for US shale will be short-lived, JP Morgan says

Key Points
  • Earlier this week, OPEC and 10 other allied producing partners agreed to keep 1.2 million barrels a day off the market for another nine months.
  • A protracted period of production cuts has seen OPEC's share of the global oil market sink to the lowest level in almost three decades.
  • "What we are saying to the bulls is: Don't get used to it," J.P. Morgan's Christyan Malek told CNBC's "Squawk Box Europe" on Thursday.
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Was hoping for a deeper oil supply cut from OPEC, analyst says

A gradual fall in oil prices over the coming years could prompt Saudi Arabia and OPEC to reclaim some of its market share from the U.S., according to the head of EMEA oil and gas research at J.P. Morgan.

Saudi Arabia and OPEC are "there to support oil while they are effectively pregnant with all this economic growth and capital they have got to deliver. But, having said that, what we are saying to the bulls is: Don't get used to it," J.P. Morgan's Christyan Malek told CNBC's "Squawk Box Europe" on Thursday.

Earlier this week, OPEC and 10 other allied producing partners agreed to keep 1.2 million barrels a day off the market for another nine months.

The energy alliance, sometimes referred to as OPEC+, has been reducing output since 2017 as part of a sustained bid to prop up crude prices.

The Middle East-dominated group has succeeded in keeping crude futures near $60 a barrel, albeit five years after oil prices last traded above $100. But, a protracted period of production cuts has seen its share of the global oil market sink to the lowest level in almost three decades.

Khalid Al-Falih, Saudi Arabia's energy and industry minister, listens during a news conference following the 176th Organization Of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on Monday, July 1, 2019.
Stefan Wermuth | Bloomberg | Getty Images

Meanwhile, the U.S. shale industry has expanded at such a rapid rate that it threatens to overwhelm OPEC-led efforts to mitigate demand concerns, swamping the global oil market with supply.

When asked whether he believed OPEC kingpin Saudi Arabia could change this dynamic and eventually outlast the U.S. shale industry, Malek replied: "I think, at the moment, with OPEC and Saudi focusing on fiscal (and) economic policy, they are absolutely two feet in the value camp."

"This value proposition, the fact they are giving shale a free pass so to speak is short-lived… I mean three of four years ago, who would have thought that they would be happy with $60 to $70?"

"The bar keeps falling, it is just very gradual. In a few years' time I expect $50 to be an okay oil price, at which point that could see Saudi and OPEC reclaim that market share and then it becomes more competitive," Malek said.

'Peak, plateau and then decline'

International benchmark Brent crude traded at around $63.80 Thursday morning, little changed from the previous session, while U.S. West Texas Intermediate (WTI) stood at $57.13, down almost 0.4%.

Speaking to reporters in Vienna, Austria earlier this week, Saudi Energy Minister Khalid al Falih said shale would eventually go the same way as every other basin in history.

It will "peak, plateau and then decline," Al Falih said, before adding: "Until it does I think it is prudent … to keep adjusting to it."