With a deal reached between oil-producing nations Saturday in Vienna, analysts at Bank of America Merrill Lynch expect the global oil market to enter into a deficit as soon as the first quarter of 2017.
It would be pertinent to mention here that the oil price war seems to be over, as global oil producers — OPEC and non-OPEC — have agreed to remove about 600,000 barrels a day of crude oil from the market.
Experts at BofA Merrill Lynch are keeping their 2017 forecasts for Brent and WTI crude oil unchanged at $61 and $59 per barrel, respectively.
According to Fransico Blanch, head of BofA Merrill Lynch Global Commodities and Derivatives Research, annual global oil demand is likely to grow by an average of 1.2 million barrels a day but there is a downside risk to this forecast.
“Demand could decline if US interest rates move higher and if the Chinese yuan depreciates in a disorderly fashion,” he said.
Analysts fear that such a development might force some OPEC nations or Russia to break free of the agreement or production could rise faster than expected in nations outside of this unlikely alliance.
Blanch said: “Our price expectation embeds a sequential 500,000 barrels per day increase in US crude production, raising output to 9.2 million barrels a day by the end of 2017.”
Experts see US natural gas balances tightening between now and mid-2018 on falling production and strong structural demand growth.
The 2017 price forecast is $3.50 per million British Thermal Units (BTUs), about 15 cents above the current forward curve. In the longer term, the Trump presidency presents some downside risks prices, as it could speed up pipeline infrastructure, allowing for a faster supply expansion.
Spot LNG prices have decoupled from Brent and may push lower even if oil prices continue to recover, as a wave of supply from US and Australia is underway. Asian buyers have bought too much LNG on long-term contracts and will be selling in the face o f this largest supply wave ever. EU and Asian spot LNG prices may eventually find support on coal-to-gas switching levels.
According to market reports, coal has been one of the best performing commodities in 2016 as China coal production has fallen steeply on mandated reduction in mining days from the government. The thermal coal price rally was exacerbated by a number of other factors, including tightness in the met coal market. Producers are now restarting production in response to prices, setting the stage for another leg down in prices next year.
