Is oil re-pricing growth expectations? ::BofA Merrill Lynch

Is oil re-pricing growth
expectations?
􀂄 A slowing economy could push Brent down below $95/bbl
Brent prices have declined by almost $20/bbl on a combination of seasonal and
cyclical headwinds. Some of these cyclical pressures are too large to ignore, such
as China’s drop in energy demand growth or Europe’s sharp contraction in credit
supply. In addition, emerging and developed markets face mounting structural
challenges. To name a few, energy importing countries like China, Japan or India
are seeing $15/MMBtu nat gas prices at the margin, while others like Brazil are
struggling with high labor costs and rising inflation. In Italy or Spain, a high cost of
capital poses a major challenge to a recovery. Should the global economic
recovery stall further, Brent oil prices could fall below $95/bbl in the near-term.
Our economists see few downside risks to EM growth…
At any rate, our economists still expect China to post GDP growth of 8.0% in 2013
and 7.7% in 2014. These numbers are consistent with our expectations of 360
and 485 thousand b/d in oil demand growth, respectively. A robust China outlook
should translate into strong EM growth and hence oil demand. Having said that,
Chinese oil demand in March grew by just 255 thousand b/d, consistent with
average GDP growth of around 5 to 6%. Surely, solid EM demand has been a
constant in the oil market for decades, so a structural slowdown in economic
activity would not bode well for global crude oil prices.
…so we keep our $112/bbl Brent forecast in 2014 for now
For now, we stick to our 2014 Brent forecast of $112/bbl despite the weaker data,
as OECD ex-US inventories remain low. But we are concerned about the
structural headwinds facing many economies. Whether it is high energy costs,
expensive labor costs, a rising cost of capital, declining profitability, or misdirected
investment into unproductive assets, the dislocations created by five years of zero
interest rate policy in DMs will likely have some negative consequences in EMs.
With oil demand growth exclusively supported by buoyant EM growth for years,
lower global GDP trend growth (say from 4% down to 3%) could push Brent firmly
out of the recent $100-120/bbl band into a lower $90-100/bbl range.

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