BofAML lowers oil price forecast on OPEC ‘misfire’

Bank of America Merrill Lynch (BofAML) has cut its price forecasts for Brent and WTI crude in 2017, citing the failure of OPEC-led production cuts to significantly reduce oil inventories.

“By increasing output in [Q4 2016] ahead of the cuts in 2017, OPEC's credibility has taken a big hit. Against market expectations, OECD total oil inventories are still above 3 billion barrels and the recovery in Libyan and Nigerian supplies, coupled with a fast return of US shale, will now likely prevent steep stock draws ahead,” the lender said in a report on Sunday.

OPEC agreed with non-OPEC oil exporters, led by Russia, in December to cut production by a combined 1.8 million bpd for the first half of 2017. The output agreement was recently extended for another nine months until early 2018.

While the deal offered support to oil prices initially, both Brent and WTI have so far reversed gains made earlier this year. The two benchmarks lost over 14 percent in the first half of 2017, amid steadily rising US output and investor skepticism over OPEC's ability to rebalance markets.

Global oil demand is also losing momentum, BofAML said, adding that it is cutting its H2 2017 demand projections by 200,000 barrels per day (bpd).

With output set to rise further, the bank’s oil supply/demand balances now point to average deficits of 210,000 bpd in 2017 and 90,000 bpd next year.

As a result, BofAML has adjusted its Brent forecast to $50 per barrel (bbl) this year and $52/bbl in 2018, from $54 and $56/bbl before.

Meanwhile, WTI is now expected to average $47 in 2017 and $50/bbl next year, compared to $52 and $53/bbl prior.

“At the heart of the issue is the fact that shale oil supply responds to prices within 3 to 5 quarters. This incredibly fast reaction time compares to 3 to 10 year cycles for most non-shale non-OPEC projects,” the report said.

A lack of understanding of shale’s impulse-response times caught OPEC “completely wrong-footed,” BofAML said, adding that the cartel’s output cuts typically take three to five quarters to affect the term structure of oil markets.

“With some producers pedaling backwards and some pedaling forwards at the same speed, it is perhaps not a surprise that inventories are not moving. In the meantime, speculators have thrown in the towel and completely reversed their record bullish position reached last February,” the lender said.