Bank of America says oil could surge back to $100, and lays out exactly how it could get there
- Bank of America Merrill Lynch's commodity strategists see a risk that Brent crude oil returns to $100 per barrel by next year.
- Brent last touched that level in September 2014, as oil prices descended into their worst crash in a generation.
- "In short, the micro drivers of the oil market remain positive, as long as global demand does not suffer from the ongoing threats of trade wars and policy uncertainty," the strategists said in a note.
Remember $100 oil? Bank of America Merrill Lynch says there's a risk it's about to come back.
Brent crude, the international benchmark, last cost that much per barrel in September 2014. What nobody knew at the time was that the oversupply of oil would continue sending prices lower and create the worst crash in a generation that wrecked oil drillers and countries reliant on its export.
A team of commodity strategists led by Francisco Blanch forecasts that Brent will rise to $70 per barrel on average this year and $75 per barrel on average next year. "We also introduce a 2Q $90/bbl Brent price target for 2019 and see a risk of $100/bbl oil next year, although we are concerned that these market dynamics could unfold over a shorter timeframe," Blanch said in a note on Wednesday.
The strategists pegged this forecast on stronger global economic growth, which should increase oil consumption. Blanch forecast demand growth of 1.5 million barrels per day in 2018, and revised his 2019 forecast up by 100,000 to 1.4 million in 2019. At the same time, geopolitical issues from Venezuela to Iran could keep a lid on exports.
Brent and West Texas Intermediate crude, the US benchmark, rose to three-year highs on Wednesday after President Donald Trump announced plans to withdraw the US from the Iran nuclear deal.
Blanch expects Iranian crude oil exports to remain little changed over the coming months as Venezuelan output continues to fall amid the country's economic problems.
Additionally, the OPEC (excluding Nigeria and Libya) has been working closely with Russia to implement output limits. Their initial agreement was necessitated by the oversupply of oil that drove prices lower. Although Blanch expects they'd taper on their agreement starting next year, the higher production would not be enough to avoid a drop in inventories.
North American producers may also scale back production, although out of necessity, according to Blanch. Several parts of the oil-supply chain are under strain, including trucking and rail.
"In short, the micro drivers of the oil market remain positive, as long as global demand does not suffer from the ongoing threats of trade wars and policy uncertainty," Blanch said. "With stocks falling quickly during the course of the next 18 months, we would expect continued upside pressure on crude oil prices and see Brent averaging $75/bbl in 2019 compared to $70/bbl this year."
$100 oil could provide a further boost for energy stocks. Higher oil prices have already propelled the S&P 500's energy sector to the top of the leaderboard this month, and the sector is up nearly 6% year-to-date.
The stronger dollar poses a risk to this forecast, Blanch said.