Oil's `Bull Run' May Be Over on Supply, JPMorgan Says (Update1)

By Nesa Subrahmaniyan

June 18 (Bloomberg) -- Crude oil's ``bull run'' may be over as prices become increasingly volatile and Saudi Arabia pledged to boost supplies, according to JPMorgan Chase & Co., the third- largest U.S. bank.

Prices are expected to ``correct'' over the next few months, JPMorgan analysts led by Brynjar Eirik Bustnes said in a report today. Spare production capacity may reach 5 million barrels a day by 2010, similar to levels in 2002 to 2003, when oil was $30 a barrel, the analysts said.

Oil price volatility over a 30-day period reached the highest since February 2007 on June 11 after New York crude futures had their biggest one-day gain of $10.75 a barrel on June 6. The Organization of Petroleum Exporting Countries last week cut its 2008 global oil demand forecast for a fifth month as record prices curb consumption while stockpiles have increased.

``Saudi has pledged to increase production by around 500,000 barrels a day over the next two months, which should show up in inventory increases,'' Bustnes said. New production from OPEC and non-OPEC would be enough to meet demand growth in until 2010, he said.

JPMorgan's crude oil price estimate is substantially below the consensus compiled by Bloomberg, Bustnes said in the report. JPMorgan's estimate for Brent crude oil in 2008 is $90 a barrel compared with the consensus analysts' estimate of $108, and from 2009 to 2011 it is forecast at $85 a barrel versus prices of $110, $105 and $100, he said.

Record Price

Crude oil in New York rose to a record $139.89 a barrel on June 16 even after Saudi Arabia, the world's biggest producer, said it is boosting output and called for a meeting in the Red Sea city of Jeddah between producers, consumers and financial institutions on June 22 to discuss ways to stabilize prices.

The International Energy Agency, the energy adviser to 27 nations, on June 10 cut its forecast for global oil demand for a fifth month on falling consumption.

The IEA reduced its 2008 forecast by about 70,000 barrels a day to 86.77 million barrels a day from 86.84 million last month, the Paris-based agency said, leaving demand growth for this year at 0.9 percent.

OPEC in its monthly report said oil demand this year will rise 1.1 million barrels a day to 86.88 million barrels, about 60,000 barrels a day lower than last month's estimate of 86.95 million barrels a day. Saudi Arabia is pumping an additional 300,000 barrels of crude oil a day this month.

OPEC Higher

``Interestingly, OPEC now has higher demand growth than IEA, which is very unusual considering their positions as exporters and importers of crude,'' Bustnes wrote in the report.

Most of the new production coming from OPEC in the next few years to 2010 would probably be part of ``spare capacity'' as non-OPEC increase supplies, he said.

Oil companies, or so-called upstream oil producers such Cnooc Ltd., PTT Exploration & Production Pcl, and Cairn Energy Plc, ``offer the best leverage to oil prices,'' the JPMorgan analysts said in the report. The shares of these companies haven't risen along with the increase in crude oil prices, the analysts said.

Upstream producers have underperformed crude prices in the past four months by 40 percent as higher prices haven't been priced in the shares of the companies, Bustnes and his colleagues wrote.

While using $90 a barrel as the oil price estimate for this year, JPMorgan is using $85 a barrel for its long-term oil price estimate for 2009 onwards, the analysts said.

``If we are wrong on oil prices, so much the better,'' they said in the report. ``Lower oil prices appear to be priced in. High oil prices fuels upgrades in earnings.''

To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net.

Last Updated: June 18, 2008 02:45 EDT