Bank of America Merrill Lynch releases 2019 Energy Outlook

It forecasts Brent crude to average $70 per barrel and an output cut from OPEC+

Commodities face three macro challenges, according to Bank of America Merrill Lynch
Commodities face three macro challenges, according to Bank of America Merrill Lynch

Bank of America Merrill Lynch released its energy outlook for 2019, making a few key predictions for the year ahead. Below, some forecasts from the report:

Brent to average $70/bbl, WTI to average $59/bbl in 2019, helped by an OPEC+ cut and global oil demand growth of 1.3mn b/d

The global oil market has sold off sharply in recent weeks mostly on the back of a major shift in US and Iran supply expectations for 2019. On the one hand, total US oil supply growth accelerated to 2.9 mn b/d YoY in the past month. On the other, the Trump administration surprised the market by issuing 8 Iran sanctions waivers, altering forward supply/demand balances in oil markets. Thus, we now project Brent and WTI to average $70/bbl and $59/bbl respectively in 2019, and $65/bbl and $60/bbl in 2020. Our assumptions embed a real reduction in OPEC+ supply of 0.5 to 1mn b/d, leading to a relatively balanced oil market and stable inventories next year. Consistent with above trend global GDP growth of 3.6%, we also expect global demand growth of 1.3mn b/d.

OPEC+ will likely deliver an output cut

While US production has easily beaten expectations in September and October, it is also important to note that Russia, Saudi Arabia, and Libya oil production has surprised to the upside in recent months. As these incremental barrels have come out of the ground in recent months, inventories have started to build again. The higher production baseline is a problem for OPEC+ and we are now embedding a meaningful reduction in OPEC output, led by Saudi and other GCC countries into our forecasts.

Commodities face three key macro challenges

In short, we are no longer as constructive on oil prices as we were back in September but we still think the market is oversold and will recover into mid-2019. After all, while budgetary breakevens for the cartel are balanced, Saudi still needs $91/bbl to square up its government budget in 2019. Another important point to note is that commodities are now lagging other asset classes. In fact, following the steep selloff in oil prices, commodity returns look pretty poor for the year.

Incremental US supplies should keep oil below $100

Very importantly, our central bullish scenario depicted in September (see Oil supply shock deepens) has changed materially and we now see average Brent crude oil prices of just $70/bbl and WTI prices of $59/bbl, compared to $80 and $71 prior. Against the supportive demand backdrop, US production growth faces some infrastructure constraints, although we have been surprised to see YoY growth rates for crude and liquids currently running north of 2.9mn b/d in the past month.

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