Brent prices will need to average $60 to $80/bbl to keep the global oil market in balance out to 2027, says a BofA Global Research report.
The report says it expects more energy price inflation and more volatility. However, by the late 2020s, tech innovation, alternative fuels, decarbonization headwinds could lead to structural downside risks, it says.
"We just completed our annual medium-term global oil supply/demand review in the midst of the strongest global oil consumption recovery since the 1970s. Having called for an average medium-term Brent crude oil price band of $50 to $70/bbl since our 2017 review, we now believe that Brent prices will need to average $60 to $80/bbl out to 2027 to keep the global oil market in balance. It is worth noting that prompt and 5-year forward Brent prices have averaged ~$62 and ~$58/bbl respectively in the past five years, so this is a meaningful change in view," said the Global Energy Paper - Medium-term outlook.
"Going forward we see more support to oil prices due to increased capital discipline across the global oil industry, thinning spare capacity, and a robust post-pandemic transportation fuel demand recovery," it said.
The report said it sees more energy price inflation, more commodity price volatility, and more basis risks (on time spreads, location spreads, or product spreads) than in the past five years. Some of this is not new.
"In our previous two annual reviews, we have argued that sticky backwardation should remain the dominant Brent crude oil market structure. This view is primarily supported by Opec+ intervention, declining spare capacity, and low inventories. Yet the consensus view that an oil demand peak is coming by the end of the decade should help keep oil in backwardation too. After all, the perception of peak oil supply contributed to a contango market structure in 2008 as prices spiked above $140/bbl. Now, we expect prompt price signals to lead oil markets and forward prices to follow," said the report.
Despite steep inventory draws and a decline in Opec spare capacity of 2.5mn b/d in the past year to just about 3mn b/d (excluding Iran), the study doesn't see a structural oil supply shortfall over the medium term.
"True, as summer travel peaks, spare capacity could fall an additional 1-2mn b/d, causing Brent oil prices to spike higher to $120/bbl. Yet project sanctioning has also sped up, with a fourfold increase YoY in liquid reserves FIDs (Final Investment Decision) in 2021. This supports the non-Opec project pipeline, which is only set to fall slightly with annual capacity additions averaging 1.7mn b/d in 2022-27 vs 1.75mn b/d in 2016-21. Opec's project pipeline looks thinner, but this excludes some long term GCC capacity expansion efforts.”
Against this sizeable supply growth, environmental policies and risks should come to the fore this decade too. Following a record year for demand in 2021, where consumption increased 5.5mn b/d YoY, the study expects another strong showing in 2022, with demand rising another 3.6mn b/d to nearly 101mn b/d, or more than 600k b/d above pre-Covid levels. Still, electric vehicle (EV) sales likely reached 8% of total car sales in 2021, an increase of more than 100% versus 2019. In our base case, EV adoption hits 50% by 2033 and 90% by 2050. The accelerated pace of adoption should force road fuel demand to peak by the mid-2020s and total oil demand to peak before 2030. In other words, oil prices should be higher and more volatile in the next five years, but eventually technological innovation, alternative fuels, and decarbonization headwinds will mount, the BofA Global Research report says.
