Brent crude oil prices are expected to average $50 to $70 per barrel through 2022, according to the latest forecast issued by Bank of America Merrill Lynch (BoFA).
The estimate is down from the bank’s previous oil price forecast of $55 to $75 per barrel.
In its report, BoFA argued that below the $50 to $70 price band, oil supply rationing and rapid emerging markets demand growth will push prices higher.
Above the band, a surge in global oil supplies and emerging markets demand destruction will curb any additional price gains.
Overall, demand is set to outpace supply on average over the forecast period, it added.
“Global oil consumption has expanded by 3.6 million barrels per day in the past two years, the best two year run rate since 2010/11 and inventories are drawing,” the report said.
“On our latest estimates, oil demand should keep growing by 1.1 million bpd per annum out to 2022, driven entirely by emerging markets.”
While carpooling, electric vehicles, or autonomous driving could slow demand, low oil prices should also discourage fast technological adoption, it added.
On the supply side, US shale oil producers will deliver “outsized market share gains” by 2022, the report found.
“Assuming a gradual recovery in oil prices into a long-term average of $50 to $70 per barrel, we project annual US shale oil growth of 700,000 bpd in 2017-22. In addition to US shale, we see some growth in Brazil, Russia, Kazakhstan and Canada.”
Non-OPEC supply growth should average 830,000 bpd annually with 80 per cent of incremental gains coming from the US.
“With non-OPEC poised to grow again, we estimate OPEC will need to increase oil output by just 400,000 bpd on average every year to meet demand through 2022. While OPEC could grow production faster, cartel revenue will likely be higher if no additional investments are made compared to scenarios where increased OPEC production leads to lower prices,” the report added.
Currently, Brent crude oil prices remain at one of the lowest levels in real terms in decades.
“Oil prices have recovered mostly thanks to OPEC and key non-OPEC players putting an end to a two year price war and agreeing to cut production by 1.8 million bpd. So OPEC spare capacity has expanded. Moreover, US shale production is now poised to recover on improved efficiencies,” the report stated.
“With demand expanding steadily while supply is not growing at all, we are confident that global inventory levels will draw strongly in coming months, cutting the excess down by more than half by year-end. This rebalancing in global inventories will likely encourage oil prices to trade within our expected band over the next five years,” it added.
However, the report also warned of key risks to its forecast including trade protectionism and an emerging markets demand slowdown; a strong USD period ahead; further productivity gains in US shale; and a renewed oil price war between OPEC and other global suppliers.
But it also highlighted upside risks including – faster-than-expected global oil demand growth; steeper-than-expected production decline rates following the collapse in global E&P capex; increased geopolitical risks; and accelerating global inflation.