Chart 34: Real Brent prices are at one of the lowest levels in decades, Chart 35: We see global light sweet crude oil averaging US$55 to and will likely encourage very strong demand growth ahead US$75/bbl over the 2016-2020 period 440 Real and nominal yearly average Brent crude oil prices 410 Medium term oil supply & demand (2016-2020) US$/bbI avg oil price
100 90
80 80
60 70
60 40
Al 60 20 2016YTD 40 nitbpd growth, 2016-20 0 2 3 4 5 6 7 8 9 10 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 supply (OPEC 2.9): low supply (OPEC 4.2): base*
demand
supply (OPEC 5.5): high
nominal oil price real oil price, rebased to 2016YTD price level
Source: BP, Bloomberg, BofA Merrill Lynch Commodities Research Source: IEA, BofA Merrill Lynch Commodities Research *4.2 mn b/d OPEC supply: Saudi: 1.3 mn b/d; Iraq: 0.8 mn b/d; other OPEC crude: 1.7 mn b/d; 0.4 mn b/d OPEC NGLs.
Non-OPEC production will not reach 2015 levels before 2020 at the earliest... Non-OPEC producers have massively reduced capex spending, down US$290bn or 42% from 2014 to 2016, in response to the low price environment. Should capex start to increase again in 2017, the effect on non-OPEC non-shale production is unlikely to be felt before 2020 at the earliest. Most of the decline in the short term comes from non- conventional output in the US, as shale is very price sensitive within a 12-month horizon. With Brent prices set to increase from US$46/bbl this year to US$80/bbI in 2020 in our base case, we believe US shale production will grow again, albeit at a slower rate than in the past four years. Total non-OPEC supply is set to drop to 56.4mn bpd in 2017 before rebounding to 57.5 mn bpd in 2020, a similar level as in 2015.
Chart 36: With Brent prices set to increase to US$80/bbl in 2020, we Chart 37: Linking this with our 5-year price deck suggests marginal US believe US shale output will grow again, albeit at a slower rate shale output grows in 2017 and acceleration thereafter
Non-OPEC oil supply growth by major country 8 Shale production forecasts aligned with BofAML WT|
mn bid price assumptions
3.0 2.5 2.0
mn b/d, YoY
BofAML f'cast
15 1.0 0.5 0.0 -0.5 -1.0 2010 2012 2014 2016F 2018F 2020F mu US meme Canada mam Mexico mmm North Sea mmm Russia Kazakhstan . . 2013 2014 2015 2016 2017 2018 2019 2020 mum Asia Brazil mmm Sudan/So. Sudan other —+— total non-OPEC base =2016@$45/bbl m2017@$59/bb!_ =2018@$67/bb| m2019+@$75/bbl Source: IEA, BofA Merrill Lynch Commodities Research Source: EIA, BofA Merrill Lynch Commodities Research
4.1mn bpd needs to be added by OPEC by 2020, namely Saudi, Iran and Iraq
The US is the only country able to ramp up production among non-cartelized players by 2020, so OPEC has to come to the rescue to provide the required incremental supplies. We estimated that demand will grow by 5.9mn bpd in 2015-20. With the market oversupply of 1.8mn bpd in 2015, OPEC needs to increase production by 4.1mn bpd in the next five years to “balance the market”. Saudi Arabia could make up for half of this given its c2mn bpd of spare capacity, and we believe it intends to at least increase its market share. We would expect other OPEC countries to expand their capacity in the
OS merrill Lynch GEMs Paper #26 | 30 June 2016 37
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