OPEC oil cartel no longer exists in any sense of meaningful and crude prices will slump to $50 a barrel over the coming
months as market forces shake out the weakest producers, Bank of America has
warned.
Revolutionary changes sweeping the world’s energy
industry will drive down the price of liquefied natural gas (LNG), creating a
“multi-year” glut and a much cheaper source of gas for Europe.
Francisco Blanch, the bank’s commodity chief, said
OPEC is “effectively dissolved” after it failed to stabilize prices at its last
meeting. “The consequences are profound and long-lasting,“ he said.
The bank said in its year-end report that at least
15pc of US shale producers are losing money at current prices, and more than
half will be under water if US crude falls below $55. The high-cost producers
in the Permian basin will be the first to “feel the pain” and may soon have to
cut back on production.
The claims pit Bank of America against its
arch-rival Citigroup, which insists that the US shale industry is far more resilient than widely supposed, with marginal costs for existing rigs nearer
$40, and much of its output hedged on the futures markets.
Bank of America said the current slump will choke
off shale projects in Argentina and Mexico, and will force retrenchment in
Canadian oil sands and some of Russia’s remote fields. The major oil companies
will have to cut back on projects with a break-even cost below $80 for Brent
crude.
It will take six months or so to whittle away the 1m
barrels a day of excess oil on the market – with US crude falling to $50 -
given that supply and demand are both “inelastic” in the short-run. That will
create the beginnings of the next shortage. “We expect a pretty sharp rebound
to the high $80s or even $90 in the second half of next year,” said Sabine
Schels, the bank’s energy expert.
Mrs Schels said the global market for (LNG) will
“change drastically” in 2015, going into a “bear market” lasting years as a
surge of supply from Australia compounds the global effects of the US gas saga.
If the forecast is correct, the LNG flood could have
powerful political effects, giving Europe a source of mass supply that can
undercut pipeline gas from Russia. The EU already has enough LNG terminals to
cover most of its gas needs.
It has not been able to use this asset as a
geostrategic bargaining chip with the Kremlin because LGN itself has been in
scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need
Russian gas at all within a couple of years.
Bank of America said the oil price crash is worth $1
trillion of stimulus for the global economy, equal to a $730bn “tax cut” in
2015. Yet the effects are complex, with winners and losers.
Barnaby Martin, the bank’s European credit chief, said
world asset markets may face a stress test as the US Federal Reserve starts to
tighten afters year of largess.
“Our biggest worry is the end of the liquidity cycle. The Fed is done and it is preparing to raise rates. The reach for yield
that we have seen since 2009 is going into reverse”, he said.
Bank of America said quantitative easing in Europe
and Japan will cover just 35pc of the global stimulus lost as the Fed pulls
back, creating a treacherous hiatus for markets. It warned that the full effect
of Fed tapering had yet to be felt.
From now on the markets cannot expect to be rescued
every time there is a squall. “The threshold for the Fed to return to QE will
be high. This is why we believe we are entering a phase in which bad news will
be bad news and volatility will likely rise,” it said.
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