Surge in oil prices to be transitory – JP Morgan

An attack on a critical Saudi oil export facility has failed, but boosted oil prices, sending Brent above $70 and WTI over $67. The surge in oil prices is likely transitory as while OPEC+ is able to capitalize on short-term disruptions now, it will not be able to forever, Jack Manley, Global Market Strategist at JP Morgan, reports.  

Key quotes

“Clearly, production cuts will help keep oil prices elevated. However, a number of forces may counteract short-term supply issues. To start, the pandemic has illuminated the effectiveness of working-from-home, which could result in fewer commuters on the road and less need for gasoline. Furthermore, demand for air travel remains depressed, and the combination of smaller fleets and an uneasiness about flying with strangers, even after vaccination, could put a strain on jet fuel prices. Finally, while the deep freeze in Texas temporarily disrupted US energy production, it did not change the fact that the US has become the marginal producer in global energy markets and OPEC+ is no longer able to unilaterally affect global supply.”

“Investors should recognize that this surge in oil prices is likely transitory, and that while OPEC+ is able to capitalize on short-term disruptions now, it will not be able to forever.”

“Given the structural anchors for oil prices and the growing importance of ‘green’ energy sources, it seems more likely than not that oil prices will stay rangebound for many years.” 

“At the same time, though, investors should recognize that despite meaningful improvements in oil prices (and better demand prospects as the global economy recovers), the US energy sector has still dramatically underperformed the broader equity market. In an environment where stocks may look expensive and income can be hard to find, the energy sector may be an area of refuge for investors puzzled by the current landscape.”