Brent crude oil prices have come down in recent days from the highs of $80 per barrel (/bbl) posted on May 17 on news that Russia and Saudi Arabia may be looking to up production, said the Bank of America Merrill Lynch (BofAML) in a new report.

The cartel and its partners have shown concerns about the impact of the rapid escalation in prices on global oil demand, added BofAML in its latest Global Energy Weekly.

 In addition, higher US interest rates and a rising US dollar have hurt Emerging Market (EM) debt while events in Italy suggest that growth in developed markets is not bulletproof either. With Iran sanctions set to further reduce supply, the oil market may have to move into demand destruction mode.

As subsidies return, oil demand turns more rigid

Oil demand growth leaders are mostly EMs and tend to be price elastic. Yet subsidies and pegs are making a come-back, adding demand rigidities to the oil market, the report said.

For instance, the upcoming elections in India are encouraging the government to intervene in retail fuel markets again, while a truckers strike in Brazil has led to a temporary cap on diesel prices. The situation is different in China, where fuel prices move more with the market. Still, trade discussions have likely constrained CNY moves, requiring an oil demand adjustment in China through higher USD oil prices.

Oil demand still appears solid, but risks are growing

“With EM governments intervening to mitigate the rise in local prices, we continue to project global oil demand to grow by 1.5 million barrels per day (b/d) this year and 1.4 million b/d next year. But we note the growing risks to consumption arising from higher US interest rates and political turmoil in Europe,” the BofAML report said.

“How would our demand projections respond to rising prices? As an example, our demand estimates would drop by 200k b/d if Brent crude prices averaged $80/bbl this year rather than $70/bbl as we expect. Still, while energy costs as a share of GDP are now at around 5 per cent, this figure is a far cry from the growth damaging 7 per cent or the recession critical 9 per cent levels,” it added. – TradeArabia News Service