Bank of America (BofA) Merrill Lynch has warned that should output cuts resulting from the ongoing Libyan conflict extend into next year, under the right economic conditions with global real GDP growing at 4.8 per cent Brent crude prices risked climbing to levels of around $175 per barrel.
“Libya has now been in a prolonged civil war for the past five months, the impact of which strongly reverberated through the global oil market,” BofA Merrill Lynch said in its outlook for oil in 2012.
Citing International Energy Agency estimates of current production for June of 80,000 barrels per day (bpd) in June, down from pre-crisis production of 1.6 million bpd, the bank said it expected production to “remain extremely constrained near-term” with “minimal levels” for the remainder of the year.
“Even looking into 2012, the likelihood of a swift re-start of production to pre-crisis levels looks small,” BofA Merrill Lynch analysts said.
Among the factors expected to impede a return to full production were damage to infrastructure that could take time to repair, the possibility of lengthy contract renegotiations and the need to rebuild reservoir pressure, which combined would see production at current levels until the second quarter of 2012 and then rising gradually to 700,000 bpd by the end of the year.
“As an average for 2012, we only see Libya produce 313,000 bpd, a rather modest increase from current levels,” the analysts said. “Such a protracted output shortage will clearly challenge Saudi Arabia’s ability to raise production to keep pace with global oil demand growth in 2012.” Under such conditions, the analysts said spare capacity would be reduced from current levels of 3.6 mbpd to just 2.7 mbpd, almost half the pre-crisis levels of 5.2 mbpd.
“Thus, the risks to our Brent crude oil price forecast on Libya’s production profile are firmly skewed to the upside,” the analysts said.
“In fact, if Libyan production does not return in 2012, monetary policy remains ultra loose, and real global economic output accelerates to 4.8 per cent as our economists project, Brent crude oil prices could briefly spike to $175 per barrel next year,” he added.
Should Libyan production, however, return to full production by mid-2012, the analysts said OECD stocks would then likely build by 340,000 bpd, instead of an expected draw of 290,000 bpd, allowing Saudi Arabia to take back some of its production increases, restoring some spare capacity to the market.
“Should Libyan oil come back in full by mid-2012, Brent crude oil prices could see a decline of about 10 per cent relative to 2011 levels, averaging close to $100 next year,” he said.
While these are two extreme cases, BofA Merrill Lynch has forecast Brent prices of $114 for 2012, ahead of which it has price forecasts for the third and fourth quarter of this year at $110 and $102 respectively.
For WTI, meanwhile, the bank has forecast $92 for this quarter and $88 for the final quarter of the year, to be followed by and average oil price of $102 for 2012.
“We see room for WTI prices to trade near $102 in 2012, although we do acknowledge some downside risks to this forecast if shale oil output in the Midwest surprises to the upside,” the analysts said.