Brent oil will hit $120 per barrel by the end of June 2022, Bank of America's commodity analyst Francisco Blanch said in a research note from Oct 29. The catalyst for BofA’s increased price forecast is the same one that has prompted every other bank to turn bullish on commodities - the current global energy crisis that has seen prices for crude oil, coal, natural gas, and LNG skyrocket as the market tightens, which in turn is causing rampant gas-to-oil substitution; an increase in air travel only adds to the bullish picture.
Just a month ago, BofA forecast that oil could reach $100 over the next six months, and that was only if we had a "very cold winter." At the time, this was expected to be the most important driver of the global energy markets. Fast forward one month and BofA feels even more confident now that the global oil demand recovery will continue to outpace supply over the next year and a half, resulting in dwindling inventories that set the stage for higher oil prices.
Looking at the recent turmoil in the energy sector, BofA writes that while oil has been playing catch-up to other fuels, petroleum markets have been mostly led by bunker fuel and naphtha since January 2020 (Exhibit 4) as factories, petrochemicals, and trade surged, while refinery run cuts limited supply. With COVID-19 having a disproportionate impact on mobility, the biggest price laggards in the energy space have been gasoline, jet fuel and diesel, otherwise the usual summer and winter season leaders. Yet things have started to change in recent months, with gasoline and distillate demand firming up (Exhibit 5) ahead of winter
This is how Blanch justifies what would be the highest oil price since the summer of 2008:
We up our oil price forecasts and targets for 2022, 2023…
Oil prices have recently risen above $80/bbl, led by gas-to-oil substitution and an increase in air travel. Where will we go next? Pent-up demand for oil was the main reason we laid out a $100 target for Brent in 2022 back in June. Yet we now believe that the run-up in global gas and coal prices has turbocharged the Brent and WTI price recovery. As we look into 2022 and 2023, we still expect oil to move from a steep deficit that has seen global inventories draw at a rate of 1.2mn b/d in the past 6 months to a more balanced market. Still, structural oil demand and supply rigidities are emerging, and we now forecast Brent and WTI crude oil prices will average $85/bbl and $75 and $82 and $70 in 2022 and 2023, respectively, compared to $75 and $65 (for Brent) and $71 and $61 (for WTI) prior.
…as we see gasoline, diesel demand leading prices higher
Forward oil balances do not appear exceptionally tight and non-OPEC+ supply growth should be able to keep up with demand over the next 2 years. Yet, spare OPEC+ capacity is dwindling due to underinvestment. Also we estimate the price elasticity of US shale supply has dropped by more than half. Plus oil demand growth should stay robust thanks to easy policies, as oil prices remain below the point where demand destruction could kick in. And even if the potential return of Iranian barrels helps keep a lid on prices in 2022, a combination of rapidly growing gasoline demand and an ongoing recovery in middle distillates, coupled with refinery constraints, could squeeze oil prices higher in 2022. For this reason, we also raise our end-1H22 Brent oil price target to $120/bbl.
Looking ahead, Blanch warns that oil prices are at risk of entering a demand rationing phase, as the expectation of peak oil demand this decade due to climate change pressures has kept long-dated oil prices depressed relative to the forward for now. Yet, if the COP26 conference that started today fails to deliver a clear “aggressive” or “Net zero” decarbonization path, the world will likely need more oil than currently available on a forward basis to meet demand growth in the 2020s.
Furthermore, even if we see a relatively balanced oil market in 2022 and 2023, there is very little crude oil in inventory across the OECD to deal with a sustained demand surge into 2025-2030. Thus, should policy center mostly on supply and not address demand simultaneously, a playbook similar to the one just observed in global gas markets may emerge for oil. Read: hyperoilflation.
Needless to say, any future collision of demand and supply rigidities in oil prices à-la-gas could be much more detrimental to the world economy. For now, inflationary pressures are feeding rising local currency prices for diesel and other fuels. Since early 2020, many EM central banks have hiked interest rates, but developed markets are nowhere close to tightening monetary policy in a significant way. At a micro level, rising energy costs are also driving light-medium oil differentials wider.
Fast forward to BofA's ominous conclusion, Blanch writes that should COP26 fail to reassure the market that energy demand is on a clear decarbonization path over the next decade, oil could join gas in the final episode of the energy squeeze game, even as a China slowdown, supply chain issues, and an SPR (Strategic Petroleum Reserve) release are near-term downside risks for oil.
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While we will have to wait 7 months to find if BofA's stagflationary forecast is accurate, OPEC+ production will be reevaluated on Thursday this week, although it is widely expected that the group will stick to its plan to add back in another 400,000 barrels per day. The issue with this plan for added production is that OPEC+ has failed to add back the barrels under its plan so far.
Other traders and banks feel oil is heading for $100, with Goldman Sachs estimating that oil demand is nearing 100 million bpd (a pre-Covid figure) leading to a $90 Brent price by year end, and demand is only set to strengthen as the winter heating season approaches and on calls for increasing jet fuel demand early next year.