BMI expects supply gap will elevate Brent to $75 per barrel by next year

A sustained deficit in the oil market this year from continued production cuts will push the price of Brent to $75 per barrel in 2019, and to $78 per barrel in 2020 on a year-onyear average basis, according to BMI Research.

“Strengthening prices will elicit a more forceful reaction from US shale and new Brazilian supply and may also, in our view, bring Saudi spare capacity,” BMI said in its latest report. The new growth alone will not plug the looming supply gap and the market is set to enter a sustained deficit from this year, placing upside pressure on prices, it said.

Opec, led by Saudi Arabia and producers outside the organisation, in particular Russia, entered into an agreement to restrict their production levels by 1.8 million barrels per day from the beginning of 2017 to draw down global inventory levels, blamed for the slump in the oil market in which prices plunged to $29 per barrel at the start of 2016 from $100 levels two years earlier.

The output curbs, now extended until the end of 2018, pushed the price of Brent to a three-year high of $70.53 per barrel last month.

BMI, a Fitch subsidiary, expets prices to remaining at $65 for the rest of year thanks to high compliance among Opec members and a bullish outlook on US shale, which is expected to act as a headwind on any increases in price.

While BMI’s estimates are higher than the Bloomberg consensus of $62 per barrel for Brent, it is conservative when compared with Goldman Sachs’ outlook, which forecasts a high of $80 per barrel in six months.

The investment bank anticipates Brent to rise to $75 per barrel in three months and fall to the same level after its midyear peak of $80 per barrel, as US shale production rises.

BMI noted that Brent’s bullish start to the year is losing steam. Prices averaged $67.77 per barrel at 4pm Dubai time. Seasonal crude inventory build-up towards the end of the first quarter could also add to the downside, it said.

While Opec has maintained fidelity to the output pact, overcomplying in some cases, this year there could be some slippages according to the report, especially among producers who can ramp up spare capacity with price increases.

The neutral zone between Saudi Arabia and Kuwait remains the only spare capacity concession in the region, while Iraq, the region’s second-largest producer, said it is targeting output of 5 million bpd this year.

Strengthening prices will elicit a reaction from US shale and Brazilian supply and may bring spare Saudi capacity BMI RESEARCH New report