Crude oil prices could reach $ 125 a barrel. Here’s why.

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Oil prices on Friday recorded their biggest one-day drop since the early days of the pandemic.

David McNew / Getty Images

Fears surrounding the new variant of the highly mutated coronavirus called Omicron criticized investor sentiment during Black Friday. While stocks have suffered — and the

Dow Jones Industrial Average

had his worst day of the year– the crude markets were the hardest hit.

The Omicron news sent a chill through the nerves of oil traders, raising the specter of another halt in world travel and a narrowing global demand for crude. After all, these factors contributed to a price war between Russia and Saudi Arabia at the start of the pandemic. That, along with the demand shock, briefly sent oil prices into unprecedented negative territory in 2020.

Black Friday saw futures contracts for international benchmark Brent crude fall by more than 10%, with futures contracts for West Texas Intermediate crude also hit, in the largest one-day drop since April 2020. US oil prices fell below $ 70 a barrel for the first time since early September.

But things were improving on Monday. The prices of both benchmarks rose about 5%, with WTI contracts changing hands at nearly $ 72 a barrel.

And there are still reasons to be bullish on oil, very bullish. In fact, crude prices measured using the Brent benchmark could exceed $ 125 a barrel in 2022 and reach $ 150 in 2023, according to a study released Monday by a team of JP Morgan strategists.

Much of the trajectory of crude is in the hands of OPEC +, the group of oil-producing countries, including Saudi Arabia and Russia, which has a disproportionate influence on world prices. This group has postponed technical meetings until later this week to assess Omicron’s impact, according to a report of Reuters citing OPEC + sources.

JP Morgan strategists see the group of domestic producers as likely to suspend planned monthly increases of 400,000 barrels per day in 2022, in order to balance the market “and potentially reduce the pending impact of new Covid variants” .

Even with this hiatus, the bank’s team believes the group’s production capacity is far less than most people think, in large part due to underinvestment. JP Morgan estimates that OPEC’s true spare capacity in 2022 is 2 million barrels per day, 43% below consensus estimates.

“This underperformance comes at a critical time as other global producers falter,” strategists said, and it puts OPEC + firmly in the driver’s seat in terms of dictating prices.

“The group has returned to a position of positive leverage, which it will defend by keeping stocks low, the market in equilibrium and by taking measures to support optimal management of reservoirs through rhythmic volume growth”, the JP Morgan team wrote in their note.

“We believe OPEC + will slow the increases initiated in early 2022, and believe the group is unlikely to increase supply unless oil prices are well supported,” they added. “By incorporating our OPEC + actual capacity model, we expect oil to exceed $ 125 / bbl in 2022 and $ 150 / bbl in 2023.”

Write to Jack Denton at [email protected]

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Felix J. Dixon