With oil stock balances next year looking softer and costs coming down, the commodity will trade at $55 and $61 per barrel during 2016 and 2017, respectively, said the Bank of America (BofA) Merrill Lynch in a report.

“Looking at the near-term, however, we still believe oil prices will rebound into year-end on a combination of factors,” said the report titled “Global Energy Weekly: Oil at an inflection point”.

“First, we see an accelerating decline in non-Opec oil supply kicking in over the next few months, with US oil output alone set to drop by 1 million barrels per day (b/d) by the second half of 2016,” the report said.

“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, we now project Brent-WTI spreads to trade at around $2 per barrel (/bbl) on average in 2016 and 2017, against an average of $11/bbl in the last 5 years.

Opec could react to low oil prices if EM demand falters, the report said.

While Opec fiscal budget break-evens have increased in recent years, Saudi can fund its deficit via government reserves and local debt as long as Brent stays in a $55 to $70/bbl range. However, Saudi cannot sustain its spending sub $40/bbl for very long.

As such, the incentive for Opec to cooperate increases exponentially on lower oil prices. Put differently, an Opec cut to keep prices above $50/bbl makes good financial sense, BofA Merrill Lynch said.

As long as it does not encourage a competitive response, a low cost revenue maximizing oligopolist would lower volumes to increase its total intake. – TradeArabia News Service