JPM brings some less than good news for the administration, which unless planning to propose another $500 billion or so gas price offsetting fiscal stimulus (which would bring total US debt to $17 trillion by the end of 2012) may find itself with the bulk of its electorate unable to drive to the voting booths come November. In a just revised crude forecast, JPM commodity analyst Larry Eagles, has hiked both his Crude and Brent expectations across the board, and now sees WTI going from $105 currently to a $120 by the end of the year, $4 higher than his prior forecast. Alas, since in another report from this morning titled “Return of Asset Reflation” JPM finally figures out what we have been saying for months, namely that the stealthy global central bank liquidity tsunami is finally spilling out of equity markets and into everything else, inflation is about to become a substantially topic in pre-election propaganda. As a reminder, when gold was at $1900 last summer, central banks had pumped about $2 trillion less into the markets. We expect the market to grasp this discrepancy shortly.
Here is what has been going on, apparently to everyone’s dismay:
And here is JPM with the first of its “reflation” analyses:
The oil market faces the risk of a short-term correction through weakening seasonal demand, falling margins, policy and economic developments. Such a correction, should it occur, is likely to be temporary, with geopolitical issues in Iran, Syria, Sudan/South Sudan, Nigeria and elsewhere creating increased demand for inventory, and providing greater leeway for OPEC to manage a price fall. The supply-side response to higher prices in North America should not be ignored, but as the recent bottlenecks in Cushing, Alberta and the Gulf Coast have shown, when production outpaces the infrastructure needed to move the oil, the market shifts pricing to slow the pace of development.
We remain alert to the potential to grow supply at a much faster rate, but ongoing decline in mature areas, supply risks in key producing countries together with the underperformance of some new frontier areas leave us to feel that it will be a greater risk in 2013/2014 than this year. More importantly, building economic momentum, albeit from a weak base, has the potential to pull oil prices higher for the next 12 to 24 months, and while downside risks remain in Developed and Emerging Markets, recent data strength together with high levels of liquidity being added by Europe and potentially Japan, and easing elsewhere provide upside. The quarterly path of our forecasts embody the timing of these risks, depicting an upward trending market lifting our Brent price forecast for 2012 to $118/bbl and to $125/bbl in 2013. Around this average, we also lift and widen our expectations for the likely price range over the course of 2012 from $100 to $120/bbl to $105 to $135/bbl.