Oil prices are experiencing a “double dip” and could extend losses as the supply glut persists for another 18 months, according to Bank of America Corp.
Risks to growth in China, the prospect of increased Iranian exports after this month’s nuclear deal and a strengthening dollar “could continue to press oil lower,” the bank said in a note dated July 24. Bank of America cut its third-quarter estimate for Brent to $50 a barrel from $54, while West Texas Intermediate was lowered to $45 from $50.
Brent and WTI returned to bear markets in the past week after falling 20 percent from peaks reached in June, as a plunge in China’s stock market sparked concern that oil demand in the world’s second-largest economy will falter. Brent traded close to $53 a barrel on Tuesday and WTI near $47.
“The much-feared double dip is here,” said analysts Francisco Blanch and Sabine Schels, who correctly predicted earlier this month that WTI was poised to drop below $50 a barrel. “The glut in the coming quarters will still continue.”
Supply will continue to exceed demand by 1 million barrels a day through to the end of 2016, it said.
A “vast reduction” in U.S. shale output may yet rebalance the market, the bank said. The nation’s shale production “should roll over” as spending cuts take effect by the first quarter of next year, it predicted. U.S. crude production remains near the highest level in data going back three decades.
Total supplies from outside the Organization of Petroleum Exporting Countries will decline by 420,000 barrels a day next year as U.S. output shrinks, the bank forecast. It maintained its 2016 projection of $62 a barrel for Brent and $57 for WTI.
Iran is starting to sell crude stockpiled on tankers following a July 14 agreement with world powers that offered relief from sanctions, Bank of America said. The first cargo has already reached East Africa, it said. The bank trimmed its year-end estimate for WTI to $55 from $57, and for Brent to $59 from $61, to reflect increased Iranian shipments.
“Iran could add an enormous amount of crude oil to an already-oversupplied market,” the bank said. “This oil will likely start flowing into global markets just as U.S. crude oil output is set to come down.”