Global oil demand will ultimately react to lower prices, though it could stay weak in the first of the year as Middle East growth slows and Russia heads into recession, a report said.

Models suggest a six-month lag and a limited response from OECD nations due to fuel efficiencies, added the Global Energy Weekly published by BofA Merrill Lynch Global Research.

Incrementally China and India will have to deliver the bulk of the global consumption increase in 2015/16. Yet 50 per cent of global oil demand growth in the last 10 years has come from oil producing countries, the report noted.

In sum, either production guidance for 2015 goes negative, global activity speeds up, or Saudi blinks, it said.

The market could become more disorderly as oil prices try to find a floor around operating cash costs, suggesting a growing risk of WTI moving below $35 per barrel near-term and Brent slipping to $40 per barrel.

Are oil prices about to turn and move higher? Not yet

Investor index buying could provide some support in the next weeks, but physical oil supply is still outpacing demand. The term structure of oil continues to weaken and inventories keep piling up. This frames the stage for lower prices in the first quarter of 2015.

To find a floor, the oil market needs to see (1) non-Opec supply curtailments, (2) Opec output cuts, or (3) stronger global demand. At the moment, none of these seem to be materializing. If anything, an impending build-up in floating storage (i.e. oil stored in vessels) could even hurt the prospects of a recovery in the second half of the year.

Non-Opec supply will not be turned off immediately

Non-Opec oil supply cuts will not come easy in the short-run, as operating cash costs sit below $40 per barrel. True, investments will be put on hold as some of the world's output is challenged below $70 per barrel in the long-run. However, production guidance continues to point up in 2015 for most listed companies

 Saudis could blink too and cut supplies. Much trumpeted financial reserves would last a lot longer at $70 or $80 per barrel than at $20 or $30 per barrel, price levels recently alluded to by Saudi oil minister Ali Al-Naimi. Yet Saudi Aramco could also increase output by 2.8 million barrels per day as US shale production shuts down, pushing Saudi's fiscal budget break-even oil price down by $22 per barrel, according to the BofA report. – TradeArabia News Service