Oil Price Could top $50 with production freeze deal according to BOA
According to Bank Of America, if a deal is struck this weekend at Doha regarding a production freeze, oil prices could top $50/bbl.
Long story short, considering that BOA's analysts calculations are accurate, if OPEC countries (excluding Iran and Russia) get together and settle for an output freeze in the next two days, the global balance would tighten with approximately 0.5 Mmbpd in the second half of 2016, thus creating a deficit in the oil market in the 3rd quarter, relative to BOA's expectations.
The analysis was published on Wednesday and if the production freeze deal becomes a reality, creating an oil market deficit in the 3rd quarter of 2016, the price of oil could easily reach and even go beyond $50/bbl; at least, that's the theory, economics 101:
In a perfect competitive market, a shortage in supply will definitely result in a higher price, provided the market demand for oil remains at least the same as today.
The price of Brent crude crashed to a twelve year low back in January, but it climbed approximately thirty percent after the news that Russia, Qatar, Saudi Arabia and Venezuela discussed an output freeze on February 16th, reaching a preliminary agreement.
To settle the matter once and for all, Qatar's capital Doha hosts a very important meeting this weekend between at least fifteen countries, including both OPEC (Organization of Petroleum Exporting Countries) and non-OPEC members such as Russia (world's 3rd oil producer, after Saudi Arabia and US).
Bank of America claims that both a hard output freeze and/or a soft output freeze, provided some enforcement mechanism is put in place, will definitely boost oil prices above $50/bbl. Brent is currently trading at ~43,10.
Also, the bank said that regardless the outcome of the meeting this weekend, the market is clearly re-balancing, due to the increased global demand and also, partially, because of a drop in the US production.
According to the US Department of Energy data, after reaching its peak last June in 2015 at 9.61 MMbpd(millions of barrels per day), a historic record, US oil production currently stands at 9.01 MMbpd.
Obviously, Bank of America also considers the probability of a failed deal at Doha this weekend. In the eventuality that such a scenario takes place, the oil prices could easily drop below $40/bbl.
One of the biggest risks for a further drop in oil prices would be Saudi Arabia announcing an increase in production.
Saudi Arabia increasing production would come as a logical consequence of the return of Iran on oil markets as a big exporter, after the Obama administration lifted the sanctions, following the nuclear deal that was signed back in January.
If that would be the case, Bank of America's prediction is that oil prices could sunk as low as $30/bbl.
The problem is that Middle East politics could prove (again) stronger than oil economics.
And that's because the deputy Crown Prince of Saudi Arabia, world's largest oil exporter, made a statement earlier this month. Mohammad bin Salman Al Saud said that Saudi Arabia would only freeze oil production if Iran would freeze theirs.
But the harsh reality is that Iran repeatedly declared that it's seeking to increase its oil production (Kuwait has similar plans by the way), in order to recover what it lost in terms of market share during the economic sanctions imposed by the US until recently.
Furthermore, Iran's oil minister dismissed any oil cap proposal as being “ridiculous."
Hence, the probability of an output freeze deal reached between Iran and Saudi Arabia is very low.
Even if Bank of America and the Russian energy minister are relatively optimistic about a positive outcome of the meeting in Doha this weekend, on April 17th , others are more on the skeptical side.
The financial giant Goldman Sachs warned about great expectations which could translate into a bearish catalyst for the oil markets, in the eventuality the talks fail.
Also, the head of European energy research for Citigroup Inc. in London warned that a failed deal this weekend would be pretty bad in regard to oil prices, after the respective meeting was built for so long.
Update after Sunday's meeting: The Doha oil talks were finished without a freeze deal, as oil producers need more time to reach an agreement; another meet between oil producing nations will probably take place later in June
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