Bank of America Merrill Lynch (BofAML) has completed its Global Energy Paper by their Global Commodity Research team, and a key message is that the bank has decided to maintain its estimates from last year, with Brent crude oil prices averaging $50 to $70/bbl in a medium-term horizon to 2023.
This forecast range compares to a current forward strip of $58/bbl on average over the forecast horizon to 2023, and a 15-year average price of $72/bbl. Global oil consumption has expanded by 1.4 million b/d in the past two years and remains on a solid footing. On our latest estimates, oil demand should keep growing by 1.1 million b/d p.a. out to 2023, falling short of average annual non-OPEC oil supply growth of 750 thousand b/d. But we expect OPEC to fill the gap, as the deal agreed to in December 2016 is cautiously pared back starting next year. What will support prices within this $50-70/bbl average range? Below this price band, US shale oil supply rationing and rapid EM demand growth likely pushing prices higher. Above this level, a surge in global oil supplies and EM demand destruction curbing additional price gains should be seen.
Given the backdrop of stronger global growth and better-than-expected compliance with the agreed cuts among OPEC and non-OPEC deal participants, we recently reviewed our inventory path for 2018. Looking forward, total OECD inventories are expected to be at 2.86 billion by the middle of the year and 2.80 billion by year-end, below the five-year average.
This drop from the current reported level of 2.90 billion barrels in November 2017 suggests that oil prices will likely be higher in 2018 than we originally expected and an average Brent crude oil price of $64/bbl are projected in 2018, compared to $56/bbl prior.
Put differently, Brent crude oil prices are expected to average $9/bbl or 17 per cent above last year in 2018, but prices could pull back in 2019 to $60/bbl as US supply responds and OPEC starts to unwind the supply deal.