BofAML forecasts 2H16 oil price recovery; downside risks prevail as OPEC meeting ends in acrimony

Brent crude oil prices are expected see a recovery in the second half of next year, leading to average price of US$50/bbl in 2016, according to Bank of America Merrill Lynch (BofAML). However, the "deep sense of acrimony" that emerged from last Friday's OPEC meeting creates downside risks to BofAML's 2016 pricing assumptions, it cautions.

BofAML highlighted that its expectations for next year "embed rational economic behaviour." The forecasts include relatively robust global oil demand growth of 1.2mbd. On the supply side, it sees sharp curtailments across almost all non-OPEC countries, leading to an oil price recovery in 2H16. It projects non-OPEC supply growth to decline by 53 per cent  to 1.1mbd in 2015. For 2016 it shows an outright contraction of 750,00bpd, compared to an average 20-year expansion of 660,000bpd.

Crucially, BofAML's supply projections for 2016 embed a quiet temporary Saudi output decline in 1Q16 to partly accommodate incremental Iran barrels. So far it has assumed that Saudi is not prepared to gain market share at any price, particularly from low-cost producers like Iran.

However, downside risks to the projections prevail following last week's OPEC meeting. BofAML reported that while there was a rollover of existing policy, there was no mention of a production ceiling, leaving the press release subject to interpretation. "Saudi’s reluctance to unilaterally shoulder any output cut just as Iran prepares to re-enter the market resulted in an exceptionally acrimonious summit," it writes. BofAML believes that Iranian output could go up by 600,000bpd over a period of six months when sanctions are lifted, affecting mostly intermediate and heavy grades. "Importantly, it was unclear if Saudi’s strategy has evolved from trying to capture market share from high cost non-OPEC producers to a full-blown market share war within the cartel itself," BofAML cautions.