Oil to trade above $60 in 2017 – Merrill Lynch

…Banks on return of production in Nigeria, others
Oscarline Onwuemenyi, with agency reports
03 May 2016, Sweetcrude, Abuja – Oil supply growth by OPEC countries will not match the output declines being experienced by non-member producers and this could lead to higher crude prices next year.

To balance the oil market by 2020, US oil and gas capital expenditure will have to increase by at least 50 per cent, leading oil prices to trade above the current forward strip and into a $55-70 per barrel range, said a report by Bank of America Merrill Lynch entitled, “Global Energy Weekly: The oil supply cliff-hanger”.

There is still a large set of drilled but uncompleted shale wells that could come on stream over the next few months and US companies are expected to play a role in stabilising non-OPEC supplies, it explained.

However, cartelized producers at the moment have limited spare productive capacity or planned investment to meet demand on a forward basis, leaving the oil market exposed to huge supply uncertainties over the next five years, it said.

A string of twists and turns ahead of producer meetings in Vienna and Doha in recent months have turned oil market developments into a serial drama.

“Yet one fact remains in this OPEC cliff-hanger: non-OPEC oil supply is indeed hanging off a cliff. We estimate global output is set to contract year-on-year (YoY) in April or May for the first time since 1Q13 as OPEC growth no longer offsets non-OPEC declines,” BofAML said in the report.

“The drop in supply has come on the back of massive cuts in global oil and gas capital expenditure. Our new analysis points to non-OPEC oil field decline rates of 4.9 per cent on average this year, up from 4.2 per cent in 2014. However, as drilling rigs in non-OPEC countries have been idled, the Middle East rig count has held steady.

“So we stick to our view that Brent will average $61 per barrel in 2017,” said the BofAML report.

“A key risk to this view is how fast Saudi and other GCC members decide to monetise their low cost reserves. For now, Aramco’s output is relatively flat compared to last year. With Saudi leaders pulling out of the oil freeze deal in Doha last minute, the market keeps second-guessing their next move.

“Also, disruptions are relatively high at the moment, suggesting there is room for production to come back in Libya, Yemen, or Nigeria if politics allow. But low oil prices could also trigger strikes and unrest in producing countries. In short, if Saudi output remains constant, oil prices should trend higher,” it concluded.

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