Bank of America Merrill Lynch warned Wednesday 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% Brent crude prices risked climbing to levels of around $175/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 b/d in June, down from pre-crisis production of 1.6 million b/d, 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 b/d by the end of the year.
"As an average for 2012, we only see Libya produce 313,000 b/d, 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 million b/d to just 2.7 million b/d, almost half the pre-crisis levels of 5.2 million b/d.
"Thus, the risks to our Brent crude oil price forecast on Libya's production profile are firmly skewed to the upside," the analysts said.
"n fact, if Libyan production does not return in 2012, monetary policy remains ultra loose, and real global economic output accelerates to 4.8% as our economists project, Brent crude oil prices could briefly spike to $175/bbl next year."
Should Libyan production, however, return to full production by mid-2012, the analysts said OECD stocks would then likely build by 340,000 b/d, instead of an expected draw of 290,000 b/d, 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% relative to 2011 levels, averaging close to $100/b next year."
While these are two extreme cases, BofA Merrill Lynch has forecast Brent prices of $114/b for 2012, ahead of which it has price forecasts for the third and fourth quarter of this year at $110/b and $102/b respectively.
For WTI, meanwhile, the bank has forecast $92/b for this quarter and $88/b for the final quarter of the year, to be followed by and average oil price of $102/b for 2012.
"We see room for WTI prices to trade near $102/b 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. --Geoff King, email@example.com
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