Oil's well, or is it?

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Oils well, or is it?

Published: Wed 22 Feb 2017, 9:10 PM

Last updated: Wed 22 Feb 2017, 11:19 PM

Global Brent crude oil prices are expected to average $50 to $70 per barrel through 2022, down from a $55 to $75 per barrel band as previously forecast, Bank of America Merrill Lynch analysts said.
"Below the $50-$70 level, oil supply rationing and rapid emerging market demand growth should push prices higher. Above it, we see a surge in global oil supplies and emerging market demand destruction curbing any additional price gains," analysts at the bank said.
On Wednesday, oil prices slipped as the US dollar rose. The US West Texas Intermediate April crude contract was down 41¢, or 0.8 per cent, at $53.92 a barrel while Brent was down 38¢, or 0.7 per cent, at $56.28.
Francisco Blanch, who heads BofA Merrill Lynch research team, said the share of energy consumption as a percentage of global GDP averaged just 3.5 per cent in 2016, the lowest level since 1999.
"As such, cheap oil will likely encourage strong demand growth ahead. In our forecast to 2022, we see global oil consumption conservatively expanding at a rate of 1.1 million bpd per annum on average through 2022, driven entirely by emerging markets. Admittedly, carpooling, electric vehicles, or autonomous driving could slow demand, but low oil prices should also discourage fast technological adoption," Blanch said.
On the supply side, analysts believe US shale oil producers will come out ahead and deliver outsized market share gains by 2022.
 "Assuming a gradual recovery in oil prices into a long-term average of $50 to $70/bbl, we project annual US shale oil growth of 700,000bpd in 2017-22. In addition to US shale, we see some growth in Brazil, Russia, Kazakhstan and Canada. Net, non-Opec supply growth should average 830,000bpd annually with 80 per cent of incremental gains coming from the US," the bank's analysts said in its Global Energy Paper.
 With non-Opec poised to grow again, BofA Merrill Lynch analysts estimate the Opec would need to increase oil output by just 400,000 bpd on average every year to meet demand through 2022. "While the Opec could grow production faster, the group's revenue will likely be higher if no additional investments are made compared to scenarios where increased Opec production leads to lower prices," they said.
Saxo Bank's head of fixed income, Simon Fasdal, said oil prices continue to remain in focus and there has been a big bet in markets recently that oil will go higher as soon as supply and demand balances out. "However, it's important to note that there will be a huge cap on the upside due to the fact that shale oil producers and other producers outside of the Opec agreement will still be supplying the market which may keep the price down."
"Speculative oil flows are a major market mover and it can't be understated that oil is also at a short-term risk of correction if the Opec cuts do not play out in reality. Major corrections in the oil market are often triggered by overextended positions in either direction and there is currently a gross-long close to one billion barrels, no doubt supported by the belief that Opec will deliver on the promised production cuts."
 "Oil prices are not likely to stray far from their current $53 to $58 range in the near term," Ed Morse, global head of commodities research at Citigroup, wrote in a note.  "Record investor net length and bearish inventory data will likely cap prices until more tangible evidence of a tighter market emerges." The effects of high Opec compliance with its historic output deal have yet to be realized and should support prices into the second quarter, Morse said.
Hans van Clef, senior energy economist for Dutch bank ABN Amor, said oil prices could easily go back to the low $30, unless Opec and other big producers such as Russia extend their current deal on output restraint.  "The downside risk has become much bigger than previously."
Analysts at the Institute of International Finance said average oil prices are expected at $52 per barrel this year - an increase of 16 per cent from 2016. "We expect some recovery in oil prices, on the back of stronger global demand and the agreement among major oil producers to cut supply," said Garbis Iradian, IIF chief economist. Analysts said key downside risks to a gradual oil price recovery include trade protectionism trends and an EM demand slowdown, a strong dollar period ahead, further productivity gains in US shale, or a renewed oil price war between Opec and other global suppliers. Upside risks include faster-than-expected global oil demand growth, steeper-than-expected production decline rates, increased geopolitical risks, and accelerating global inflation. - issacjohn@khaleejtimes.com
 

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Issac John

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