With OPEC giving up on its mission of “ensuring the stabilization of oil markets” last week and allowing the market to “balance itself”, the cartel has entered a new era, according to BofA Merrill Lynch Global Research.
“The first consequence of this change will be a huge structural pick up in oil price volatility. After reaching the lowest point in history this summer at 11%, Brent ATM 1m implied volatility is now 40%. Because OPEC has moved away from moderating prices, we see $50+/bbl price swings becoming a more recurrent event. Long-dated oil price vol could move up structurally. Who benefits from higher oil vol? Low cost producers with strong balance sheets,” it said.
“On the fundamental side, excess barrels can move into storage for a while when global supply is running above demand to the tune of around 1 million b/d. But ultimately global oil supply and demand need to adjust via lower prices. As OPEC failed to take crude oil off the market last week against our initial expectations, we now bring down our 2015 Brent and WTI crude oil price forecasts again to $77 and $72/bbl respectively, and introduce a forecast of $85 and $81/bbl for 2016.”
“Both neither a supply reduction nor a demand increase will come easily, as oil demand and supply is pretty inelastic in the short-run. In the Eagle Ford for example, rigs tend to respond to price changes within one month, with output following five months later, on our estimates. Likewise, we find that oil demand takes on average six months before it really starts respond to lower prices. So the recent drop in prices could start to be felt in 2H2015, possibly at the same time that we see the first responses on the supply side. In our view, the lower prices go near-term, the greater the rebound we can expect in 2H15.”