JPMorgan Chase & Co. (NYSE:JPM) became the most pessimistic major bank on Wall Street after cutting its oil forecast on Monday. The bank’s commodity research team headed by David Martin, drastically cut their outlook for both Brent and Crude oil, saying the rampant oversupply will keep prices depressed until late this year.
The new forecast calls for Brent to average $31.25 a barrel in 2016, down from $51.50 expected previously. Crude should trade around $31.50 a barrel, down from $48.88.
JPMorgan Chase Says a Perfect Storm is Brewing
The downbeat report comes at a time when both benchmarks have tumbled over 20% since the start of the year. A perfect cocktail of warm weather, growth fears, and concerns that OPEC will fail to reach an agreement to cut production has rattled traders and investors across the globe.
Making things worse was the removal of Iran sanctions over the weekend. This opens up the prospect of millions of barrels of oil hitting a market that is already grappling with oversupply. Add to that the Chinese yuan depreciation, which makes importing oil more expensive for the world’s second biggest economy.
“The rapid drop in prices since the start of the year arguably reflects the deterioration in fundamentals… but also a growing consensus that focuses on rising stress with regards to Chinese currency policy,” analysts at JPMorgan Chase said in the note.
“However, if these concerns were to become a reality…there exists further substantial downside.”
JPMorgan Chase & Co. (NYSE:JPM)’s latest forecast downgrade follows a string of oil outlook changes last week. Goldman Sachs said it still expects oil to bounce back to $40 a barrel by the middle of year, while London-based Standard Chartered warned that prices could plunge to as low as $10 a barrel.
Comparing the average price forecast for 2016 shows that JPMorgan Chase is by far the most bearish of major Wall Street banks. That honor was earlier held by Barclays, which has a WTI target of $37 a barrel.
Downtrend to Continue Until Prices Bring Producers to their ‘Knees’
So where does the floor lie for the market? Bears see oil bottoming at around $10-levels. While that may sound crazy, Again Capital founder John Kilduff reckons that recovery won’t start until the market finds a price that finally persuades drillers to curtail production.
And he says that the first signs of that happening were visible last week. Russian Deputy Finance Minister Maxim Oreshkin told a local news agency that the current price rout may result in “quite hard and fast closures” of some producers in the next few months.