Oil between $ 300 and $ 500 a barrel? JP Morgan thinks that could be his fair price

While the main consuming countries, led by the United States, announced this week that they will release oil from their national reserves to curb the rise in prices, a barrel of crude it is actually quite cheap relative to other financial assets, according to JPMorgan Chase & Co.

In a report released this week by Marko Kolanovic, a global strategist at the bank led by Jamie Dimon, Kolanovic and his team calculate a way to assess whether current oil prices are currently cheap or expensive by looking at the historical relationship with other asset classes.

According to Kolanovic, oil prices are currently driven by demand from economies that reopen their activity, supply problems due to low investment in energy infrastructure and capital flows (for example, ESG strategies) as well as the increase in the monetary base or general inflation, among other factors.

Nevertheless, when comparing crude oil prices to other major asset classes over the past 20 years, oil seems pretty cheap. In particular, oil is only in the 12th percentile relative to world stocks (and in the 7th percentile relative to US stocks), in the 10th percentile relative to copper, in the 20th percentile relative to the gold, in the 40th percentile for bonds and in the 8th percentile for central bank asset purchases.

“Conservatively, focusing only on global stocks, bonds and commodities, oil is in the 19th historical percentile; to reach the historical median (50th percentile), oil would have to be trading at least $ 115 per barrel, “explains the strategist.

Kolanovic insists that this estimate is conservative, since “expensive assets” are excluded from their calculations, such as central bank balance sheets and the Nasdaq, which would imply that the average price of a barrel of crude should move between 300 and 500 dollars. That being said, JPMorgan strategists are healed by warning that this is just one of many ways to analyze prices and does not represent their short-term targets for a barrel of crude.

Even so, they conclude that in relation to the general levels of prices of various assets and the monetary base, oil is remarkably cheap. Kolanovic estimates that it could be said that oil-producing countries (often developing countries) they have been subsidizing to oil-importing countries (often developed countries), given the extensive monetary and asset inflation in the developed world over the past 20 years.

It is worth remembering how oil has had some precipitous declines over the years and, for example, is still well below the levels recorded from 2011 to 2014. This is in contrast to many other financial assets, which are at record levels, something that suggests that oil has not kept pace with the growth of central bank balance sheets in their attempt to face the effects of the pandemic.