BofA expects oil to peak at $95/bbl this summer

Bank of America has revised upwards its price forecasts for Brent crude, the benchmark in Europe, and WTI, the benchmark in the US. The global head of commodities and derivatives at Bank of America Research, Francisco Blanch, warns that factors such as low oil inventories, OPEC+ production cuts, geopolitical tensions and solid economic growth could push oil prices to $95 a barrel by the summer. 'A cyclical rebound is on the horizon, just as the Federal Reserve and the ECB are about to cut rates,' confirms Blanch, who says: 'A spike in oil prices could further limit the ability of central banks to provide stimulus'.

Key findings

• Low oil stocks, OPEC+ production cuts, geopolitical tensions and strong economic growth have reversed oil price trends.
• BofA now estimates hat improving demand has helped push world oil markets into a deficit in 2Q24 and 3Q24 of around 450,000 b/d.
• BofA raises their 2024 Brent and WTI crude oil forecasts to $86 and $81/bbl, and sees prices peaking at around $95/bbl this summer.

Author: Francisco Blanch, Global Head of Commodities and Derivatives at Bank of America Research.

Geopolitics & low inventories in the petroleum complex

Spot commodity prices hit a 2 year low at the start of this year, providing much needed inflation relief to global consumers. Yet low inventories across the oil complex, OPEC+ output cuts, geopolitical tensions, and robust economic growth figures have flipped price trends and now point to a tighter-than-expected summer driving season, supporting firm backwardation in crude and products. Key data shows an incipient cyclical upswing is on the way, just as the Fed and ECB are poised to start cutting rates. Then again, rising fuel prices impact headline CPI as higher gasoline feeds into concurrent and 10y breakeven inflation. With services inflation appearing particularly sticky, an oil price run may further cap the ability of central banks to provide stimulus.

Tighter-than-expected summer season for fuel

So, oil is fighting the Fed, again (see The battle royale between oil and money). For now, rates markets are looking through higher oil despite rising inflation and GDP growth expectations. Cheaper electricity prices have provided some relief, coupled with a deflation-exporting Chinese economy, and ample spare crude oil production capacity in OPEC+ has eased concerns. Yet increased tensions with Iran, Russia, or Venezuela, together with slowing US shale crude oil production could firm up the grip of Gulf Cooperation Council (GCC) countries on the crude oil market. Geopolitical turmoil has also boosted oil demand via longer trade routes and impacted supply by reducing refining capacity via attacks on Russian energy infrastructure.

Raising 2024 forecasts

With Middle East tensions on the rise, OPEC+ supply side measures have pushed crude oil volatility down to the lowest level in years and encouraged CTA bulls to pile up into oil. Adding to a complex backdrop, we now estimate that improving economic growth expectations have helped push global oil markets into a deficit in 2Q24 and 3Q24 of ~450 thousand b/d. Thus, we increase our average Brent and WTI price forecast for 2024 to $86 and $81/bbl, respectively and see prices peaking at around $95/bbl this summer. Even then, firm supply growth from the Americas in 2025 suggests long-dated oil prices should remain anchored. So, we keep our projections for next year unchanged, although we admit that limited capex creates some upside risks to medium-term oil prices.