Oil could hit $70/bbl in 2017: BofAML

Brent crude prices are predicted to average $61 per barrel (bbl) in 2017, and could hit $70/bbl at the peak of the U.S. driving season, Bank of America Merrill Lynch (BofAML) said in a report on Monday.

OPEC’s decision on Nov. 30 to cut production to 32.5 million barrels a day (mbd), in response to the prolonged slump in oil prices and supply glut in the market, “marks a clear turning point in cartel politics,” BofAML noted.

A group of non-members including Russia also agreed to join the production cuts earlier this week, jointly pledging to curb output by 558,000 barrels per day (bpd) starting Jan. 1 2017.

“As a result, the global oil market should enter into a deficit as soon as Q1 2017 and we project total global oil demand roughly 560,000 bpd above supply on average over the course of next year,” analysts at BofAML said.

On this assumption, the bank said it expects global benchmark Brent crude to average $61/bbl in 2017 and hit $70/bbl at the peak of the US driving season. Meanwhile, WTI crude oil prices should average $59/bbl over the same period.

However, commodity prices face two key downside risks over the next few months: OPEC discord and an EM demand slowdown, the report said.

A dysfunctional OPEC remains the top concern for the market, “with contradictory statements by different actors creating the appearance of discord within the cartel prior to the supply cut deal announced in Vienna.”

Iran and Iraq, two of the group’s major producers, had sought exemptions to production cuts, on the grounds that their supply had been affected by sanctions and conflict respectively.

Moreover, skepticism remains that output cuts will be fully implemented, BofAML said.

“Even then, we still expect up to 1 million bpd of supply to exit the market in Q1 2017 led by Saudi and other GCC member cuts,” the bank added.

Apart from internal disagreements within OPEC, a slowdown in emerging market demand also remains a risk for commodity prices.

Moreover, should the U.S. Federal Reserve turn to more hawkish language and signal the possibility of several rate hikes next year, commodity prices may further suffer, the report said.