The risk of a decline in global oil prices after the peak of the US driving season back in April was highlighted by the research team of BofA in the beginning of 2015. Since then, growth concerns around China coupled with the expectation of increased Iranian output in 2016 have temporarily driven oil prices even lower than it was anticipated. Also, a strong USD has been a drag on oil in the last 12 months, as global nominal GDP in USD is contracting. As the Fed moves to hike rates, dollar strength seems poised to persist particularly against the CNY, capping USD oil prices. With projected balances looking softer and costs coming down, BofA now pulled down the 2016 and 2017 forecasts for Brent to $55 and $61/bbl.
Looking at the near-term, however, there are some reasons to believe that oil prices will rebound into year-end on a combination of factors. First, an accelerating decline in non-OPEC oil supply will be kicking in over the next few months, with US oil output alone set to drop by 1 million b/d by 2H16. Second, increased Chinese and EM monetary stimulus could lend temporary support to oil demand. Last but not least, global oil consumption will pick up on a seasonal basis by more than 1 million b/d heading into the winter, preventing further stock builds near-term. Moreover, Brent-WTI spreads are projected to trade at around $2/bbl on average in 2016 and 2017, against an average of $11/bbl in the last 5 years.
