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Faster economic growth later in the year could awaken the giant and put Brent prices on an upward path, the Bank notes in a report.

15 Jan 2013

Commodity Online
Bank of America Merrill Lynch sticks to its 1H13 forecast of $109/bbl for Brent and sees Brent crude oil prices stuck in a range for now.

But faster economic growth later in the year could awaken the giant and put Brent prices on an upward path, the Bank notes in a report.

Given the warm winter weather, low European refining margins, and receding non-OPEC disruptions, the Brent crude oil market is missing a catalyst to propel prices higher short-term, the Bank noted. On the other hand, OECD total petroleum stocks outside of the US remain low.

Moreover, the Fed is likely printing $1 trillion this year, geopolitical risks are high, and social spending within OPEC will likely keep budget break-even costs elevated.

Global growth

The outlook for global growth has undoubtedly started to brighten at year-end. Although Europe remains mired in a double-dip recession, confidence has notably improved. On the back of that, OECD oil demand is just contracting modestly.

Likewise, growth in EMs accelerated into year-end after a mid-year slump in growth, with China particularly surprising to the upside. In line with these trends, oil consumption in EMs has been accelerating.

In November, China’s apparent oil consumption rose by an eye-opening 0.94 million b/d YoY to a new record high of 10.5 million b/d. Manufacturing in India, South Korea and Taiwan expanded strongly at year-end with equally positive repercussions for oil demand.

Why Brent is trading below-par

In this context it seems perhaps surprising that Brent crude oil prices have failed to increase much in recent weeks, hovering around $110-112/bbl.

Partly to blame is the mild winter weather experienced so far. In Europe, unseasonably warm weather is depressing the demand for heating oil, in turn driving down distillate margins.

The US East Cost is also experiencing warmer-than-normal weather. So far in January temperatures were 1.4 and 0.5 std dev above the historical mean in OECD Europe and the USA, respectively.

If such warm weather were to continue, that could reduce Q1 oil demand by 230 thousand b/d in Europe and 140 thousand b/d in the US compared to normal weather, respectively.

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