Oil glut set to increase on US shale production

Commodity still vulnerable despite Opec output cut deal, based on which the Bank of America Merrill Lynch has cut its forecast for Brent crude by $2 for next year

Opec left itself vulnerable to the quick return of US shale oil and the recovery of production in exempt members. Ramzi Boudina / Reuters
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Opec’s attempt to cut the world oil glut has backfired and will further stress the more exposed economies this year, according to a new report by Bank of America Merrill Lynch.

By increasing its output sharply towards the end of last year, before it reached a deal to curb output this year, Opec left itself vulnerable to the quick return of US shale oil and the recovery of production in exempt members, Libya and Nigeria, argues the bank.

“With output set to rise further, our oil supply/demand balances now point to average deficits of 210,000 barrels per day in 2017 and 90,000 bpd in 2018,” which will not be enough to make a significant dent in the 3 billion barrel-plus overhang of OECD oil inventories, the report, led by Francisco Blanch, the head of commodities research, says.

Bank of America Merrill Lynch is cutting its forecast for world benchmark North Sea Brent crude oil by $2 to US$50 per barrel for this year and $54 for next year.

In a separate report, the bank says it expects a mixed performance from the region’s economies depending on how buffered they are from swings in the oil price.

The UAE, for example, should run a small fiscal surplus even at Brent with $50 per barrel.

Bank of America Merrill Lynch has a similar GDP forecast to others, including the IMF, expecting the UAE economy to grow by 0.9 per cent this year, down from 2.2 per cent last year.

“The headline figure masks a likely contraction in the oil sector due to the Opec deal, but we see non-hydrocarbon real GDP growth picking up to 2.7 per cent in 2017, from 2.3 per cent in 2016,” the report, led by David Hauner, regional strategist, says. “Over the medium term, we expect non-oil growth to increase to 3-3.5 per cent on the back of greater Expo 2020 projects.”

On Abu Dhabi’s finances, the bank says there have been changes to the revenue the central government receives from government-related entities (GREs) that should improve its fiscal position.

“The central government now receives a portion of Adia’s investment income (likely through dividends),” the report notes. “This helped narrow the financing gap [and] efforts to obtain greater dividends from GREs are continuing, as dividends from Adia, Adnoc, ADX, and for the first time, from Adic (in turn, from bank holdings) and Adwea, were up-streamed to the sovereign.”

Bank of America Merrill Lynch says the UAE government is unlikely to borrow this year but may choose to do so in the domestic market  to help beef up the bond market.

Elsewhere, the bank says Saudi Arabia’s economic reforms are “credible, robust, and generally there is a strong government commitment,” although there are risks of slippage because of persistent depressed oil prices. Oman and Bahrain remain the weaker of the Arabian Gulf economies.

On Bahrain, Bank of America Merrill Lynch says: “Past a cyclical near-term improvement, we do not yet sense there is a material and credible medium-term fiscal adjustment plan.”

Oman has required various levels of assistance from its neighbours. “The potential GCC support to Oman would be credit-positive, if it were to materialise, although it may not alter credit fundamentals,” says the bank, referring to Oman’s deteriorating fiscal and external deficits.