International oil benchmark Brent crude will average $56 a barrel next year and could hit a high of $70 during the peak US driving season, according to a report by Bank of America Merrill Lynch (BofAML)
The bank said the global oil market experienced a “clear turning point” this year with a robust 1.5 million barrel per day increase in demand and an OPEC/non-OPEC supply deal cutting 1.8 million bpd.
As a result, it said global oil demand would likely expand by 1.5 million bpd again next year, with US supply likely to rise from 500,000 bpd this year to 870,000 bpd, but continued OPEC cuts balancing the market.
BofAML also projected Saudi Arabia and Russia would extend the current output cut deal through the end of 2018 and lay out a clear exit strategy by the second quarter of next year.
Brent crude will average $60 in the fourth quarter of 2017 and $56.60 in the first half of 2018 from the bank’s previous forecasts of $54 and $52.50 per barrel, according to the forecast.
Meanwhile, WTI is expected to average $54 this quarter and $52.50 in the first half of 2018 from previous forecasts of $49 and $48.50 respectively.
“Our revised global oil supply and demand forecasts point to a sizeable deficit in 2017 of -230 thousand bpd and a more balanced market in 2018. Our projections also reflect the idea that global oil markets are more balanced than the US crude market,” said report author Francisco Blanch, head of commodities and derivatives research, and the bank’s global commodity research team.
However, he also warned of the worsening political situation in the Middle East as the US dollar appeared to be coming to the end of a 10-month slump.
“With tensions rising from Qatar to Saudi to Iraq to Iran to Venezuela, the next unexpected supply loss is just a matter of time, in our view.”
Iraq, the second largest producer in OPEC, was highlighted, as a geopolitical concern in particular due to a dispute between the Baghdad and Kurdish governments over the latter’s independence vote.
Since Baghdad took over disputed fields in Kirkuk producing 280,000 barels per day shipments through a Kurdish export pipeline have dropped from 600,000 to 200-300,000, it said.
BofAML also warned that a global deficit could be on the horizon in part due to the backwardation policies of OPEC discouraging investment in refining capacity.
Another factor that could hit investment is electric vehicles sales, amid the bank’s estimates that 34 per cent of overall car sales could be EVs by 2030.
“Should EV sales get to our analysts’ projected level on the projected timeframe, oil demand growth could collapse as soon as 2022/23E,” the bank said.
“Why invest billions of dollars in refining capacity that will come on stream in 2022 just as EVs hit the road? Instead, many refiners may opt to minimise short-term investment, maximise short-term profitability, and run refineries as terminal value assets, in our view.”