Despite the potential COVID-19 resurgence due to the emergence of the Omicron variant, JPMorgan estimates that Brent prices could hit $125 a barrel next year, rising to $150 a barrel in 2023.
“We believe the market may overestimate the impacts of the recent emergence of the Omicron variant of COVID-19 on oil prices during the US holiday period,” the US banking giant said in a note.
JPMorgan said it believes a 3-month pause to the Organization of the Petroleum Exporting Countries and allies (OPEC+) plan of increasing production by 400,000 barrels per day (bpd) in monthly increments will be needed in the first half of 2022 to balance the market.
However, the bank then believes OPEC+ will struggle to deliver monthly growth of over 250,000 bpd once reinstated.
JPMorgan estimates the real spare capacity of OPEC+ stands at 2 million bpd next year. The bank said that the spare capacity equates to 4 percent of total capacity, down from an average of 14 percent between 1995 and 2020. When this buffer plunges, oil prices can surge with investors applying a premium to prices.
The bank, however, is not calling for oil to trade at $125 a barrel for all of 2022. Instead, the bank is predicting crude will average $88 in 2021 and “overshoot” to $125 at some point. Likewise, it sees Brent averaging $82 in 2023 but overshooting to $150.
Oil prices saw the biggest one-day fall since the early days of the coronavirus pandemic on Friday over fears that the Omicron variant can deal a blow to surging energy demand. However, crude recovered on Monday but still remains below its recent highs.
Earlier, OPEC+ had also delayed its meeting scheduled on Tuesday to Thursday to give itself more time to assess the potential impact of Omicron.