Bank of America Merrill Lynch (BofAML) has lifted its average Brent crude oil price forecast for 2019 from $75 per barrel (/bbl) to $80/bbl compared to a Cal19 forward of $75, BofAML said in a report.

 “Note that our previous projections only embedded Iran supply losses of 500,000 b/d. We now include a 1 million b/d reduction in Iran exports on a more aggressive US stance and highlight upside risk to this view,” the report said.

“Meanwhile, our demand growth projections for 2019 are roughly unchanged as weaker growth in EM offsets stronger growth in DMs. As a result, our projected deficit for 2019 widens from 300 to 400 thousand b/d. Notably, we also lift our Brent crude oil target from $90 to $95/bbl by end of 2Q19. Last, we believe long-dated Brent crude oil prices could temporarily move above medium term equilibrium levels, potentially exceeding $70/bbl.”

“In contrast to our marked bullishness on Brent, we just lift our WTI crude oil forecasts to $67/bbl in 2018 and $71/bbl in 2019, up from $65 and $69/bbl prior. Note that our projections imply the expectation of a wider Brent-WTI spread in 2019,” BofAML said.

“In our view, NYMEX WTI crude oil prices will lag Brent in the move higher as US infrastructure constraints will not likely be resolved for another 12 months. Moreover, as we explained in a recent note (see Reversal of fortunes), bottlenecks in the Permian basin could well extend to other areas such as the Bakken or the Niobrara, and we do not even rule out temporary export capacity constraints in the Gulf Coast as domestic output overwhelms logistics.”

An oil spike and crash scenario is also possible

BofAML noted that the likelihood of an oil spike and crash scenario akin to the one observed in 2008 has increased. In the coming months, the three upcoming supply factors discussed in this note (Iran sanctions, US shale bottlenecks, and IMO 2020) will likely dominate oil balances.

One year out, the focus could shift to three demand factors.

First, crude oil prices are rising against a strong dollar backdrop. Thus, prices are unlikely to rise as fast as and as high as they did in 2007/08 when the US dollar weakened in response to Fed rates cuts.

Second, increased levels of debt means EMs are now in a more fragile starting position than in 2008.

Third, higher US rates, lower US corporate taxes, and new US tariffs could continue to suction capital out of EMs. As a result, significant EM oil demand destruction could follow if Brent crude oil spikes above $120/bbl. – TradeArabia News Service