Brent crude oil prices will average $50 to $70 per barrel (/bbl) through 2022, according to an annual medium-term supply/demand analysis conducted by Bank of America Merrill Lynch (BofAML).
While global oil consumption has expanded by 3.6 million barrels per day (b/d) in the past two years, 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 b/d, BofAML said in its latest “Global Energy Paper”.
So Opec spare capacity has expanded, the report noted. Moreover, US shale production is now poised to recover on improved efficiencies following the rebound in longer-dated WTI prices above $50/bbl.
Demand will conservatively grow by 1.1 million b/d per year
If medium-term oil prices were to fall below the $50 to $70/bbl band, oil supply rationing and rapid EM demand growth should push prices higher.
“Above it, we see a surge in global oil supplies and EM demand destruction curbing any additional price gains,” BofAML said in the report.
After all, Brent crude oil prices remain at one of the lowest levels in real terms in decades. The share of energy consumption as a per cent 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 b/d per annum on average through 2022, driven entirely by EMs. Admittedly, carpooling, electric vehicles, or autonomous driving could slow demand, but low oil prices should also discourage fast technological adoption,” the report said.
Opec loses market share to US shale if prices are over $55
“On the supply side, we 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 thousand b/d in 2017-22,” BofAML said.
“In addition to US shale, we see some growth in Brazil, Russia, Kazakhstan and Canada. Net, non-Opec supply growth should average 830,000 b/d 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 400k b/d 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.”
Key factors affecting prices
The BofAML report highlights downside risks to its forecast: (1) trade protectionism and an EM demand slowdown, (2) a strong USD period ahead, (3) further productivity gains in US shale, or (4) a renewed oil price war between Opec and other global suppliers.
In contrast to last year, BofAML notes the upside risks to its view: (1) faster-than-expected global oil demand growth, (2) steeper-than-expected production decline rates following the collapse in global E&P capex, (3) increased geopolitical risks, and (4) accelerating global inflation.