Have we finally hit the bottom in oil prices? Brent is trading above $81 after a four-day climb, well above the $73 low hit during the December oil selloff, and in line with what JPM believe is oil's fair value of $78 for February. Despite the rally, oil has erased any geopolitical premium from the price after the Kataib Hezbollah militia suspended attacks on US interests in Syria and Iraq and Iran acknowledged publicly its interest in not seeing further escalation. Another source of risk reduction have been reports that Israel and Hamas are working on a ceasefire and hostage release framework brokered by the US, Egypt and Qatar. The oil market was further kept on edge last week as investors got a reminder of the risks lurking on the balance sheets of smaller US banks, when shares in New York Community Bancorp cratered almost 40%.
Near-term dynamics aside, JPM's chief commodity strategist Natasha Kaneva writes that her Brent outlook continues to project a tightening market with prices rising from here by another $10 by May. Her price outlook "assumes zero geopolitical premium and a view that Saudi Arabia and Russia will bring a combined 400 kbd of their voluntary cuts back into the market starting from April."
How do we get there? Well, according to the JPM strategist, the answer is same as in the third quarter of last year, via a drop in inventories.
