BofA Equity Research Oil Price Forecast - Dec 16

[dan_s]

2022 looks like a balanced market
There is one common denominator framing expectations for oil prices at the start of
2022: the very real likelihood that global oil markets return to surplus. However the
range of estimates between the three major commentators (IEA, EIA, OPEC) remains
wide and in our view needs to be seen in the context of one very critical question: will
OPEC+ intervention persist in a demand recovery? All three have revised estimates in
recent weeks with demand generally trimmed for 2022 in the wake of the Omicron
COVID variant. The punchline is that on its latest estimates, the EIA and OPEC both
project cumulative inventory builds over the course of the year between 170 – 237mm
bbls – an implied surplus the equivalent of 0.5mm – 0.7mm bpd But this is also almost
exactly the shortfall in OPEC+ production versus its stated quota and largely accounted
for by Nigeria and Angola. So, in the event OPEC+ production does not make up the
shortfall, the indication is pointed towards a balanced market – starting with a surplus
building towards a tighter market over the balance of the year. As a final observation
remember the wild card for winter oil demand: gas prices in Europe and the risk of gas /
oil substitution. European Natural Gas have rebounded and recently made a new high of
$43.55/MMBTU – equivalent to $261/bbl or 3.5x Brent.

Early year caution, but tighter outlook remains in place
Still, with additional supplies due to hit the market from the release of strategic reserves
(18mm bbls pending from the first US sale on Dec 17th) and OPEC+ additions in Jan-Mar
into the weakest (seasonal) demand part of the year, it seems reasonable that oil prices
could face near term headwinds until the net impacts of Omicron and OPEC+ policy
become clear. For now our commodity team has not changed its commodity forecasts
that start the year at $85 Brent rising to $95 in 2Q22; barring any change in OPEC policy
or somehow faster recovery in demand we expect the early year surplus to act as a cap
to 1H22 price outlook. How the balance of the year plays out is largely a call on a 2022
mobility recovery but with two final observations worth considering as we ponder 2022:
Saudi’s demonstrable intervention that has shown itself prepared to aggressively
manage oil markets on condition it is not competing for market share and the COVID
impact on a jet fuel recovery which remains the critical link to closing the demand gap
and where our airlines analyst has so far retained his expectations of full recovery in
available seat miles by summer. So where that leaves us is pretty much where we been
now, for several months – an improving oil outlook as a function of declining COVID
threat, managed by OPEC intervention and a global supply / demand outlook that when
adjusted for the inability of some OPEC countries to hit their numbers is tighter than it
looks. But from a starting point that is low global oil stocks, we believe the while the
near term risk is towards a softer oil market in early 2022, the key drivers of a tighter
supply demand balance remain in place.