Monetary forces are dragging down Brent crude prices, BofA Global Research said in a new report, revealing that the company has cut its average Brent price forecast for 2023.
“Since we last updated our forecasts in February, Brent crude prices have fallen with US regional bank shares in March only to recover in April when OPEC+ announced a big production cut,” BofA Global Research analysts said in the report.
“However, macro weakness continued to drag Brent crude prices lower as concerns about the health of the financial sector increased,” the analysts added.
“As central banks continue to overcorrect their latest policy mistake (high inflation), oil rushes to anticipate disinflation and a US recession fueled by bank failures and tighter lending conditions,” the analysts continued .
“Furthermore, US debt ceiling tensions risk further exacerbating these negative macro headwinds, with credit default swaps (CDS) on US Treasuries they are now trading at their highest levels since 2009,” the analysts continued to note.
In the report, analysts at BofA Global Research stated that OPEC+ appears committed to cutting oil production further if necessary. They also said in the report that lower oil prices should spur demand at a time when China’s economy is showing signs of recovery.
“In any case, tighter money tends to precede falling inflation by a year or two. Continued bank failures risk triggering a credit crunch that drags demand down and commodity prices higher casualties,” analysts warn in the report.
“Should US small businesses stop hiring in 2H23 as credit tightens, gasoline demand could suffer and oil would lose some of its core strength. Fundamentally, after a robust period of pullback in 2022, oil spread times have weakened in 2023 as oil inventories rise,” the analysts added.
BofA Brent 2023 Forecast
In the report, BofA Global Research analysts revealed that they had revised down their expectations for global oil consumption growth to 1.2 million barrels per day and one million barrels per day in 2023 and 2024, respectively. Analysts said in the report that this cut is due to an expected contraction in OECD demand of 0.4 million barrels per day and 0.2 million barrels per day this year and next.
“But even with a weaker demand outlook, we forecast oil market shortfalls of around one million bpd for 2H23 and 0.4 million bpd for 2024, supporting Brent crude prices ,” the analysts said in the report.
“It is true that these deficits could widen if OPEC+ chooses to deepen its production cuts by 0.5 million barrels per day or one million barrels per day,” the analysts added.
“With negative macro trends poised to amplify demand weakness, we lower our average Brent crude price forecast to $80 per barrel in 2023. However, we leave our 2024 Brent crude forecast at $90 per barrel because we believe OECD demand will end with it. improve while OPEC+ will likely continue to proactively and preemptively manage supply,” the analysts continued.
Excessive oscillations
In a separate report sent to Rigzone this week, analysts at Standard Chartered said they believe speculative swings have become excessive relative to the underlying news flow and fundamental data.
“Whether the tendency of speculators to swing sharply in the same direction is due to an over-reliance on similar algorithms or similar analysts is a moot point; the result has been unnecessary volatility, in our view,” they say the analysts.
In the report, Standard Chartered analysts noted that the collapse of Silicon Valley Bank (SVB) led to a record move on the short side of oil, but added that the latest swing is of similar magnitude.
“One of the most striking features of the SVB collapse in March was that it led to the fastest move to the short side in the oil markets. The money manager’s net position in the four main Brent and WTI futures contracts cut by 228.9 million barrels (mb) in just two weeks, surpassing even the rate of net sales at the start of the Covid pandemic,” analysts said in the report.
“The speculative move to the short side in the two weeks following the collapse of SVB was more than six times greater than that following the collapses of Bear Stearns and Lehman Brothers in 2008. Most of the selling in the post-SVB short it reversed after the April 2 decision by some OPEC+ members to make voluntary production cuts, but it has now picked up pace,” analysts added.
“The latest position data shows a 184.6 mb change in the net speculative position over two weeks. Over the past five years, more net sales have only occurred at the start of the pandemic and after the collapse of the SVB,” analysts continued to point out.
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