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Oil prices have been range-bound for several months now
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Yet the rapid spike in gas prices may lead to substitution
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Winter weather could roll forward our $100/bbl oil call
A recent report of BofA Global Research stated that the global crude oil prices staged a remarkable rally all the way through late June 2021 as gasoline demand surged into the summer months. Yet prices have been range-bound since then, as a lack of product demand leadership from the distillate complex has prevented further upside. Has the oil rally stalled?
“As other energy prices like natural gas and coal keep pushing higher, upside risks to the oil market have started to build. For starters, there is an estimated 1.8mn b/d of available gas to oil switching at power plants capacity across Europe and Asia, even if only a fraction of this capacity is likely to be utilized. Switching may also be possible at industrial operations, including some refineries, which could lead to more oil demand this winter,” the report said.
Although the Covid-19 Delta variant remains a problem, particularly for emerging markets, consumption is coming back with a vengeance led by China and India
The report, however, said: “Yet the rapid spike in gas prices may lead to substitution. Further supporting oil prices, global demand is coming back and OECD oil inventories just dropped to the 10 year average. Looking at US total product demand, we note that volumes are already back to pre-pandemic levels in aggregate. Although the Covid-19 Delta variant remains a problem, particularly for emerging markets, consumption is coming back with a vengeance led by China and India. From natural gas liquids used in petrochemical processes, to light products like gasoline, to bunker fuels in shipping and power generation, petroleum demand appears to be very robust. And distillates, the dominant fuel in oil pricing dynamics over the winter months, have lagged due to limited air traffic. But a surge in demand for heating oil and kero could boost distillate demand.
The BofA Global Research report said, “We continue to project that oil prices will remain range-bound in 2H21 and maintain our average Brent crude oil forecast of $70/bbl for this period (Exhibit 40), although we now target Brent to be at $75/bbl by year end as we see growing upside risks. In line with this view, we project deficits over the coming months that should support oil prices into year-end.”
“A new Covid-19 wave, taper tantrum, a China debt crisis, and the return of Iranian crude barrels could push oil lower. However, weather is quickly becoming the most important driver of energy markets. If the winter turns out to be much colder than normal, global oil demand could surge by 1 to 2mn b/d. Under this scenario, the oil market deficit this winter could easily exceed 2mn b/d and our $100/bbl oil target for the middle of next year could quickly be rolled forward six months,” it said.
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