Saudi Arabia, Russia have ‘limited’ ability to control oil prices: BofAML

The ability of OPEC members (notably Saudi Arabia) and Russia to curtail the rise in oil prices by increasing production is limited in the face of mounting supply disruptions and robust demand growth, Bank of America Merrill Lynch (BofAML) noted in a report on Monday.

Higher oil prices, therefore, seem inevitable and $100 a barrel is easily within reach, the report added.

Brent crude oil prices are up more than 30 percent this year and have reached levels last seen in 2014. The report discusses the factors that could drive oil prices to $100 a barrel and the impact of sustained oil spike on global growth.

The most important near-term driver of oil prices is the supply shock coming out of Iran because of the impending US sanctions, the report maintained.

Refiners from Europe, Korea, Japan and India have already cut their purchases from Iran, and exports have fallen by 900 mbd in the last five months.

However, China (a major buyer of Iran oil) will take a middle course, maintaining its current imports from Iran, defying the sanctions, but not increasing imports, the report said, adding that China is increasing its crude oil imports from West Africa to compensate for import cuts from the US and possibly Iran.

Apart from Iran sanctions, the collapse of the Venezuelan economy (an OPEC member), and US shale oil bottlenecks are causing further supply disruption, BofAML report added.

Oil production in Venezuela has fallen by more than a third from its 2016 level and is at its lowest level since the 1940s.

However, the report said, with the global economy growing slightly above trend, demand growth is also robust that would drive up the prices.

Nevertheless, it said if oil remains around $100 a barrel next year, growth in the Euro area, the UK and Japan would slow by a few tenths. However, since the US, Australia and Brazil have ramped up energy production this will likely cushion the blow to global growth.