BofA Flags Energy Price Trend

Global energy prices have not materially moved higher to reflect a potential bounce up in Chinese demand, according to a new BofA Global Research report, which set about finding out why.

“First, China inventories for key commodities like oil or coal have increased in recent months due to a wave of Covid-19 cases and a surge in domestic mine supply,” the report stated.

“Coupled with warm weather and laxer than expected sanctions on Russian energy, the Chinese reopening has been negative for oil prices in the very short run. In turn, falling energy and goods prices have allowed global inflation expectations to come down very quickly, boosting hopes that U.S. and European inflation will normalize by the summer,” the report added.

“Falling inflation expectations have in turn allowed for a run up in equity and bond prices. But as we approach 2Q and 3Q23, we believe the reopening of the Chinese economy could unleash a large wave of pent-up demand over the next 18 months similar to the U.S. and Europe in 2021,” the BofA Global Research report continued.

In the report, BofA Global Research noted that it sees a modest global oil deficit for the second half of the year “that embeds a robust China recovery and zero oil demand growth across the OECD”.

“This combination, we believe, will push Brent oil prices to $110 per barrel by the summer,” the report stated.

“On one side, a stronger than expected Chinese recovery, coupled with better economic performance in the U.S./EU, could further distort expectations of falling inflation. On the other hand, a deep recession in Europe and the U.S. could move oil markets into a surplus and push prices lower into 2H23,” the report highlighted.

In a briefing sent to Rigzone earlier this month, Goldman Sachs noted that the abrupt end of China’s Covid controls might hamper growth in the very short term, but added that the reopening is expected to result in a sharp rebound in the coming months.

“Our economists recently raised their full-year GDP growth forecast for 2023 to 5.2 percent from 4.5 percent because of China’s earlier than expected reopening,” Goldman Sachs stated in the briefing.

Confirmed Covid-19 cases in China have dropped for two consecutive weeks, according to the latest data from the World Health Organization (WHO). The country saw 142,066 confirmed cases in the week commencing January 16, WHO data shows. China’s peak weekly case count was seen in the week commencing May 23, 2022, at 576,367, according to WHO figures.

To contact the author, email andreas.exarheas@rigzone.com