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Why oil prices already at highs could surge another 10% by summer, according to BofA

Yuheng Zhan   

Why oil prices already at highs could surge another 10% by summer, according to BofA
  • US oil prices hit a seven-month high this week amidst rising geopolitical risks and falling inventories.
  • Bank of America forecasts Brent and WTI will average $86 and $81 per barrel this year, and both peak around $95 in summer.

US oil prices rallied to a seven-month high this week as geopolitical risks ramped up, and Bank of America says they're poised to surge another 10% by this summer.

Brent crude futures hovered near $89.77 per barrel on Wednesday morning, while West Texas Intermediate crude futures are trading at approximately $85.89 a barrel.

The Bank of America Global Research team forecasts Brent and WTI crude prices to average $86 and $81 per barrel this year, with both peaking around $95 per barrel each during the summer. That represents a roughly 10% jump from the current already lofty levels.

"We now estimate that improving economic growth expectations have helped push global oil markets into a deficit in 2Q24 and 3Q24 of ~450 thousand barrel per day," analysts wrote in a research note on Wednesday.

"One of the risks we have recently highlighted is the potential for summer gasoline on distillate competition that drags prices even higher into the July 4 summer driving peak," they added.

Diving deeper, insufficient inventory driven by OPEC alliance's reserve cuts, along with geopolitical conflict, are playing two major roles in the price surge.

On the supply side, as OPEC+ extended 2.2 million bpd output cuts, Bofa said the cuts are "finally starting to tilt balances into a structural deficit."

"Beyond tightness in petroleum products, Brent and WTI front-to-third month timespreads show signs of a firm crude oil market and further inventory draws ahead," the note said.

On top of that, the market braces for escalating geopolitical risks. Refinery attacks by Ukrainian drones in Russia have slashed global refining capacity, reducing fuel availability in the export market, according to the bank.

"Geopolitical tensions have both boosted oil demand and curbed supplies during the past few months," the team said, adding that collapsed freight volumes in the Panama and Suez Canals force longer trade routes via the Cape or Magellan, boosting oil demand by 150 thousand barrels per day.

Apart from these, the bank added that anticipation of rate cuts by major central banks in the upcoming month will also boost energy prices during the summer.

"The upside in cyclical economic activity and thus energy and metals prices could come just as the Fed and the European Central Bank (ECB) are poised to start cutting interest rates over the coming months," the note said.

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