Friday 28 July 2017
 
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ANALYSIS

Brent likely to average $50 this year: report

DUBAI, 26 days ago

A Bank of America (BofA) Merrill Lynch research study has cut the average Brent forecasts to $50 this year and $52 per barrel (/bbl) next year, from $54 and $56/bbl before.

By increasing output in 4Q16 ahead of the cuts in 2017, Opec's credibility has taken a big hit, said the report titled “Global Energy Weekly: Opec plan misfires”.

Against market expectations, OECD total oil inventories are still above three billion barrels and the recovery in Libyan and Nigerian supplies, coupled with a fast return of US shale, will now likely prevent steep stock draws ahead.

“Moreover, global oil demand is losing momentum and we are reducing our demand projections for the second half of 2017 (2H17) by 200,000 b/d,” the report said, adding that “with output set to rise further, our oil supply/demand balances now point to average deficits of 210,000 b/d in 2017 and 90,000 b/d in 2018. As a result, we adjust our WTI crude oil forecasts to average $47 this year and $50/bbl next year, compared to $52 and $53/bbl prior.”

Shale oil and Opec face similar output/price lags

At the heart of the issue is the fact that shale oil supply responds to prices within 3 to 5 quarters. This incredibly fast reaction time compares to 3 to 10 year cycles for most non-shale non-Opec projects. “In our view, a lack of understanding of these shale impulse-response times has caught Opec completely wrong-footed.

“After all, our work shows that the typical Opec output cut takes 3 to 5 quarters to impact the term structure of oil markets, the cartel's stated goal when it agreed to curb production last December. With some producers pedalling backwards and some pedalling forwards at the same speed, it is perhaps not a surprise that inventories are not moving. In the meantime, speculators have thrown in the towel and completely reversed their record bullish position reached last February,” the report said.

Moreover, global oil demand is losing momentum

Speculators have also cut back their longs because oil demand growth has undershot expectations in 1H17. Why is global oil demand growth running at half the rate of the last two years?

“We can point to cyclical, secular, and one-off factors. While one-off factors including a warm winter and India's demonetization will pass, we not see a big oil demand acceleration from here on due to negative secular and cyclical trends.

“For example, tighter monetary policy is a cyclical headwind for oil, while a secular demand rotation into liquid petroleum gases and out of gasoline/diesel will remove support from WTI crude oil prices. The rising supply and softer demand backdrop has resulted in higher-than-expected inventory levels, and we now believe WTI will remain in contango through year-end and possibly until next year's driving season,” BofAML said.

Shale is very price elastic in a $45-55/bbl band

Producer hedging activity has been exceptionally subdued in recent weeks as Calendar 2018 prices pulled back to $45/bbl.

“This drop should trigger a producer response, as we believe the price elasticity of shale oil supply is very high in a $45 to $55/bbl band. For instance, we see US shale oil supply grow on a year-on-year (YoY) basis by 1.1 million b/d at $55/bbl but see growth of just 200,000 b/d at $45. Every dollar move in the price of oil in a $40 to $60 band adds or subtracts about 100 thousand b/d to US crude supply. So if demand rises over time and Opec sticks to its deal in the longer term, we see a forward price anchor for WTI in the $45 to $50/bbl range and a backwardated structure of $3 to $7/bbl. We view this market structure as a ‘terminal stylized oil forward’,” the study said.- TradeArabia News Service




Tags: Opec | Brent | Bank of America | WTI |

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