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Monday, March 27, 2023

Oil Hits 3 Year High As Bank of America Now Sees Spike To $100

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Oil prices are rallying, facilitated by the ongoing failure of the Iran nuclear talks to reach a deal (which is widely expected to boost global oil output), and a series of sell side analyst calls for oil to rise anywhere from $80 to as high as $100 or more.

The first bullish call came from Citigroup, which said that Brent will touch $85/bbl before Q4 2021, with the bank’s oil analyst and one-time OPEC advisor, Ed Morse, writing that “we now see Brent oil prices averaging in the high $70s for the rest of the year, with a high probability of touching $85 before subsiding with markets rebalancing.” 

As a result, the bank raised its 2021 Brent price forecast by $4 to $72/bbl and its 2022 estimate by $8 to $67, while the London benchmark is seen averaging $77 in 3Q and $78 in 4Q this year, higher by $4 and $9 versus its previous forecast, respectively.

But a far more notable, and outlier call, came overnight from BofA which in a report titled “Oil’s ALl About The Benjamin”.

Analyst Francisco Blanch laid down the strongest call yet among major forecasters for an oil price return to triple digits, writing that oil may surge to $100 a barrel next year as travel demand rebounds, and as global oil consumption continues to outstrip supply in 2022 as the economic recovery from the pandemic boosts fuel consumption, while investment in new production is crimped by environmental concerns, the bank said in a report.

Summarizing this super bullish thesis, Blanch writes that “a combo of factors could push oil to $100/bbl (a “Benjamin”) next year, mostly on three key demand and three key supply factors.”

  1. First, there is plenty of pent up mobility demand after an 18 month lockdown.
  2. Second, mass transit will lag, boosting private car usage for a prolonged period of time.
  3. Third, pre-pandemic studies show more remote work could result in more miles driven, as work-from-home turns into work-from-car.

At the same time, on the supply side BofA expects…

  1. government policy pressure in the US and around the world to curb capex over coming quarters to meet Paris goals.
  2. Secondly, investors have become more vocal against energy sector spending for both financial and ESG reasons.
  3. Third, judicial pressures are rising to limit CO2 emissions.

In short, demand is poised to bounce back and supply may not fully keep up, placing OPEC in control of the oil market in 2022.

“We believe that the robust global oil demand recovery will outpace supply growth over the next 18 months, further draining inventories and setting the stage for higher oil prices,” Blanch wrote in the note, in which he also significantly raised his price forecasts for average Brent Crude prices next year. “There is plenty of pent-up oil demand ready to be unleashed,” he added.

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