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Tuesday, January 31, 2023

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Dovish Fed Will Send Oil Back To $100: BofA

The Bank of America has predicted that Brent could quickly go past $90 per barrel on the back of a dovish pivot in the U.S. Federal Reserve and successful economic reopening by China.

BofA’s chief commodity strategist Francisco Blanche forecast that Brent prices–currently trading around $78–will average $100/bbl in 2023 thanks to Chinese oil demand recovery on a post-COVID reopening coupled with a drop in Russian supplies of about 1 million barrels per day (bpd). According to the investment bank, OPEC+ is likely to fully implement a 2 million bpd output cut in a bid to boost oil prices.

The forecast has come at a time when oil prices have been steadily declining due to fears that a weakening global economy would curb fuel demand. Last week, Beijing announced the most sweeping changes to its strict Covid-19 guidelines, including relaxing testing requirements and travel restrictions. Further, people infected with Covid-19 but have only mild or no symptoms are now allowed to isolate at home instead of convalescing in centrally managed facilities.

Our oil demand and price projections for 2023 rely heavily on robust China and India demand growth, so any Asia reopening delays could affect our expected price trajectory,” said Blanch, adding that the path to a post-pandemic environment may not be easy “given the low levels of immunity in China.”

Upside aside, how much lower could oil prices fall from here? According to BofA, “downside should be limited (see $80 is the new $60 for oil), as Saudi Arabia has historically shifted crude oil production up and down in line with Brent prices (Exhibit 15) and the US government could also come in to replenish reserves.”

Additionally, western sanctions may lead to a 1mn b/d output loss according to BofA, which also notes that supply disruptions keep piling up in global oil markets. “The current period is witnessing the largest structural disruptions in the oil market since Libya went offline in 2020 due to an internal political strife. But there are also major output dislocations in other corners of the world (Exhibit 18), including Venezuela, Nigeria, or Iran. In that sense, we note the remarkable recovery in Russian crude oil runs during the past 12 months. While volumes came down at first, Russia’s refineries still have to see crude runs fall in a significant way to make a dent on balances.

Last week, crude oil futures surrendered all gains for the year, posting their largest weekly losses in more than eight months, as restarts for key pipelines eased supply concerns coupled with ongoing worries about a global recession and weaker crude demand from China. Front-month Nymex crude for January delivery finished the week -11.2% lower to $71.02/bbl, extending its losing streak to six straight sessions, while February Brent crude closed -11% to $76.10/bbl, the biggest weekly percentage decline for both benchmarks since April.

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