Morgan Stanley shouts "Super Cycle Returns"! Predicts "Oil Price of $150" and foresees "Multiple Energy Crises" in the next decade.

Over the past two years, Goldman Sachs has been the leader of the energy bull market on Wall Street. They accurately predicted the epic surge in oil prices in 2022. However, in this year's oil price crash, Goldman Sachs suffered a setback, and their star analyst and chief commodity strategist, Jeff Currie, resigned in disappointment.

But as oil prices rebounded 30% from their mid-year lows, JPMorgan Chase decided to step up and take over the "bull market leader" baton from Goldman Sachs.

JPMorgan Chase energy analyst Christyan Malek stated in an overnight report that their "Super Cycle" series report is making a strong comeback. JPMorgan Chase had been bearish on oil prices from 2013 to 2019, and then launched the "Super Cycle" series report in 2020. This year, the Wall Street giant has been in a wait-and-see mode.

Considering the gradual depletion of investments in the oil industry and the inability of green energy alone to meet global energy demand, Malek predicts that in the short or medium term, oil prices could rise to $150 per barrel, which is 62.6% higher than the current Brent crude price. He also forecasts that the global oil shortfall will expand to 7.1 million barrels per day by 2030.

Malek stated:

We strategically shorted in December last year, took profits in April, and have remained neutral since then. Although oil prices have risen significantly since June (up 30%, with the European Stoxx 600 Oil and Gas Index SXEP up about 10%), energy stocks have lagged behind.

We are once again optimistic about the global energy market and reiterate our long-term target oil price of $80 per barrel. We also reaffirm our view in the "Super Cycle IV" report that in the short to medium term, oil prices could rise to $150 per barrel, and in the long term, to $100 per barrel.

Malek explained that the main factors supporting the rise in oil prices are:

The prospect of longer-term higher interest rates has slowed capital inflows into new supply.

Rising equity costs have pushed Brent crude's cash breakeven point above $75 per barrel (after buybacks), as companies structurally return more cash to shareholders, thereby pushing up the marginal cost of oil.

Systemic and policy-driven pressures have accelerated the transition to green energy and raised concerns about demand peaking.

In conclusion, it is a self-reinforcing energy macro outlook under a longer-term higher interest rate prospect, as the industry struggles to justify large-scale investments beyond 2030.

JPMorgan Chase predicts that the oil market supply-demand gap will be 1.1 million barrels per day in 2025, expanding to 7.1 million barrels per day by 2030. This forecast reflects both optimistic expectations for demand and pessimistic predictions for supply. And the astonishing daily shortage of 7 million barrels will require not only an increase in oil prices, but also a significant increase.

Is there still room for global energy stocks to rise?

Returning to the report, JPMorgan goes on to mention that the global oil market has shifted from a risk of "discount" (demand) to a risk premium (lower overcapacity/rising marginal costs), that is, the risk has shifted from the demand side to the supply side.

Our analysis shows that the supply-demand gap in the oil market can only be filled by Saudi Arabia's spare capacity (and to a lesser extent other Gulf oil-producing countries), enabling it to meet a record-breaking 55% of incremental demand growth between 2025 and 2030, compared to an average of 18% between 2005 and 2018.

We estimate that OPEC increasing production and depleting its spare capacity (about 4.2-4.3 million barrels per day; Saudi Arabia 3.2 million barrels per day) could result in a risk premium of about $20 per barrel, while our long-term oil price expectation is $80 per barrel (compared to a back-end curve increase of about 18%).

In addition, the company's cash flow not only supports a long-term price of $80 per barrel, but also indicates that the required oil price for large energy companies to fund capital expenditures, dividends, debt, and cash returns continues to rise.

Malek has upgraded the rating of global energy stocks to "hold", with the following main reasons:

More positive macro outlook (we prefer oil over natural gas as the former has structural bullish characteristics and lower volatility due to OPEC's slowing down);

Actual cash flow balance for companies (compared to the future), implying a free cash flow yield (FCF yield) of about 12% in 2024, which would increase to around 15% if oil prices reach $100 per barrel;

Upside risk to earnings per share (EPS). Based on MTM calculations, our 2024 expectations are about 10% higher than the market, and in January, our expectations were about 10%;

Cash return rate >30%, supporting attractive valuations relative to the market;

If global inventories continue to decline and oil prices rise, OPEC may increase production in the next 12 months. Historically, this has been favorable for energy stocks as it usually indicates improving fundamentals (demand). Energy stocks tend to outperform the market and decouple from oil prices when production increases.

We note that despite a 30% increase in oil prices since Saudi Arabia launched its 1 million barrels per day production cut plan in June, stocks have only risen by about 10%, indicating a negative decoupling.

Fasten your seat belts, there may be "multiple energy crises" in the next decade

Despite being optimistic about oil prices, Malek has sent an important signal to fundamental investors - "buckle up."

While we believe that the industry is in a structural bull market and oil prices should normalize and rise, we expect oil prices and energy stocks to trade within a wider price range, with higher Weighted Average Cost of Capital (WACC) and concerns about ESG/demand peaking potentially exacerbating oil price volatility.

We recommend adopting absolute price corrections in the coming years and taking advantage of these opportunities to establish directional long positions in the integrated energy market, especially in stocks with higher oil beta coefficients. We acknowledge the downside risks associated with factors such as global recession. However, in this scenario, the supply-demand fundamentals remain tight, and the energy sector should outperform the broader market.

Importantly, if there is a demand shock, we believe that OPEC can further cut production to help stabilize oil prices. Additionally, due to the risk posed by stock valuations facing "longer-term higher interest rates," we believe that the energy industry typically outperforms the broader market when the overall stock market declines, as it serves as a macro hedge against inflation, interest rates, and geopolitical risks.

Finally, we believe that the global economy can withstand triple-digit nominal oil prices, as oil prices are still below the peaks of 2008 and 2011 when adjusted for inflation, and below the "demand destruction zone" (i.e., oil's share of global GDP > 5%, currently only about 2.5%).

In response to the threat posed by the rise of electric vehicles to fossil fuel demand, JPMorgan Chase dismisses it:

We believe that oil demand will not peak within our investment horizon (2030) as a significant amount of fuel is needed to offset the 11EJ energy deficit mentioned in our global energy outlook.

Due to supply chain, infrastructure, and critical material bottlenecks, clean energy systems will not mature sufficiently in the next decade, capturing technologies are not perfect enough, and they cannot deliver enough "clean" electricity to end customers. Therefore, this puts greater pressure on traditional fuels to fill the gap and meet the growing demand driven by emerging markets.

Malek warns that without increased capital expenditure in oil and gas, the world will still face energy shortages and a significant increase in commodity prices. This could lead to multiple oil-dominated energy crises in the next decade, potentially more severe than last year's gas crisis in Europe.

Furthermore, it also helps OPEC firmly steer the global oil market, capturing a larger share of demand growth while mitigating sharp oil price fluctuations.