Oil Price Forecast from BofA Research- Dec 3

[dan_s]

BofA Equity Research: Technical path to $60 Brent?
02 December 2020
This week's EIA data remains overshadowed by a yet to be decided outcome from the OPEC meeting ongoing at the time of writing. While considerable uncertainty remains, we believe two issues are relevant: first, headlines suggest some compromise from apparent discourse between Saudi, Russia and the UAE. Second is that with the rollout of a vaccine, expectations of a recovery in global oil demand looks increasingly a case of when, not if. The BofA base case is a recovery towards $50 Brent in 2021 and to $55 in 2022; but our commodity team has also set a mid- 2021 Brent crude oil price target of $60/bbl on an expected surge in summer gasoline/driving demand . This last point as while oil prices have already shown signs of life in response to vaccine news, physical supply / demand balances have not recovered so that the bulk of the price response to date has been largely driven by paper markets – and brings technicals into play. This week, our technical team published its latest view on Brent. The summary is that with Brent breaking out to new highs in late November brings the possibility of $60 Brent in 1H21. In isolation, ‘technicals’ come with obvious caveats: but with what is widely expected by a recovery in global demand, at least based on forecasts by the IEA, EIA and OPEC. The potential for these two to align has upside implications for the US oils, that we believe broadly ‘discount’ a current forward strip closer to $47.

My forecast/valuation models are all based on the assumption that WTI will average $50/bbl in 2021, but I do believe, as BofA points out, that the surge in demand which comes each summer (unless the pandemic gets a lot worse) will push WTI much higher. U.S. and OECD oil inventories are only slightly higher than normal today and they should fall rapidly in Q2 2021.