With global oil stocks still too high and US supply recovering faster than anticipated, Brent is seen averaging $54 per barrel in 2017 and $56 per barrel in 2018, says a Bank of America Merrill Lynch (BofAML) report.
The sharp drop in Brent prices last week does not signal an end to an oil price recovery or an Opec failure to rebalance the global oil market, said BofAML’s Global Energy Weekly report by Francisco Blanch and its Global Commodity Research team.
Rather, spot and forward Brent crude oil prices have fallen simultaneously, suggesting an oil price "level realignment" and not a cyclical downturn. Investors have become concerned about the pace and breadth of the recovery in the US rig count and about the pace of US inventory draws, encouraging large scale liquidation of spec long positions in WTI and Brent. Still, most US producers remain underhedged in 2018 and US rig count increases should slow.
“With Opec cuts working at a slower pace than expected, we are adjusting our inventory projections and our 2018 global oil balances. Our revised supply and demand numbers now show a balanced market next year, from 450,000 barrels per day (b/d) deficit prior, but we still expect an average deficit of 610,000 b/d in 2017,” BofAML said.
“For WTI, we now project $52 per barrel (/bbl) and $53/bbl, compared to $59 and $63 prior.”
Much of global oil demand growth is NGLs, not crude
Also, oil demand remains a challenge, as gasoline is oversupplied and diesel is not really booming either. But the main problem on the demand side is not so much its rate of growth, but its composition. About 33 per cent of the global oil consumption growth seen in the fourth quarter of 2016 (4Q16) and 1Q17 is coming from NGLs (natural gas liquids).
Demand growth for liquids in India or China has run at double digits in the past 18 months, as low priced NGLs are displacing biomass, LNG and naphtha. Much of this incremental ethane, butane, and propane consumption does not impact global crude oil balances, as a $25/bbl commodity cannot lift up a $50/bbl one. And global transportation fuel demand growth is limping at 0.7 per cent year-on-year (YoY).
Still constructive on spot oil prices, but more modestly so
Yet transportation oil demand should firm up as global GDP growth accelerates. Plus OECD inventories will eventually decline, in our view. The recent drop in long-dated WTI crude prices will act to curb growth in the US oil rig count.
Plus natural declines and underinvestment will eventually catch up with the cartel. The oil market should flip into backwardation, if cyclical forces allow. However, a softer supply/demand balance and a higher starting level for global oil inventories will likely keep near-dated Brent in the $50 to 60/bbl range over the next 18 months.
Forward prices 24 months out, eventually, will likely trade at an average $3 to 7/bbl discount to the prompt, the BofAML report concluded.
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