Oil prices could fluctuate wildly in the coming months, Bank of America said.
Analysts highlighted eight risks that could send oil up or down by $5 to $20 per barrel.
They include OPEC+ production, global recession, and a possible Iran nuclear deal.
Oil prices are set to face significant pressure in the coming months as a slate of supply and demand risks could push prices more than 20% higher or lower, according to Bank of America.
In a Tuesday note to clients, analysts maintained their $100 per barrel Brent forecast for 2023, but highlighted eight risks that could send oil up or down by $5 to $20 per barrel.
1. Global recession
Manufacturing data signals that a contraction in industrial activity is likely, which hints at a looming recession. A global downturn could cut oil demand growth expectations by over 1 million barrels a day, potentially sending Brent crude closer to $75 per barrel, according to the note.
2. Iran nuclear deal
A deal to revive the Iran nuclear agreement could add up to 1 million barrels a day to the market, BofA said, estimating that oil prices could temporarily drop by $10 to $15 per barrel.
But OPEC+ would likely react swiftly, with other members taking some production out of the market, according to the note.
3. Europe’s energy crisis leading to more oil demand
With gas and electricity prices soaring to record highs across the continent, as well as more cuts to Nord Stream 1 pipeline flows, analysts said there is a risk that Europe and Asia could begin burning oil instead of coal and natural gas.
While there is still some downside oil price risks due to demand destruction and weaker growth in Europe, Bank of America expects “a lot of substitution” to take place.
4. Refining risks
Worldwide, refiners have shed roughly 2 million barrels per day of crude distillation capacity compared to 2020-2021 due to “shut ins and underinvestment,” according to Bank of America.
This poses a challenge to OPEC+, as increasing crude supplies for refineries would worsen current imbalances but, at the same time, cutting supplies threatens to push prices even higher.
“The reduction in refining capacity has already led to extreme movements in key petroleum product crack spreads including naphtha, gasoline, diesel or fuel oil,” analysts wrote.
5. Light-heavy differentials
The light-heavy differential, or the spread between light products like gasoline and diesel and heavy fuel oil, is a key measure for energy markets. However, a key bottleneck in this differential has emerged which threatens to push OPEC+ to slash output — which would then push oil prices higher.
“Specifically, light-heavy differentials have blown out from $3.5/bbl two years ago to $12/bbl at present (WTI at Cushing minus WCS at Cushing),” BofA wrote.
6. Iraq and Libya
Geopolitical uncertainty in Iraq and Libya threaten to send crude prices soaring, and developments could sway the oil cartel’s next output decision.
For example, Libyan production fell to 1.16 million barrels per day earlier this year to 680,000 barrels per day in July, BofA noted. Iraqi oil production has increased since 2020 but that trend could reverse course depending on political conflicts in the coming months.
7. Strategic oil reserves
The US is set to conclude releases from the Strategic Petroleum Reserve in October, and with strategic inventories falling sharply over recent months, a gap in the market may emerge that could sway OPEC+ production, BofA said.
8. China
The world’s second largest oil consumer and refiner has imposed stringent COVID-19 lockdowns, which have led to falling demand and sell-offs in oil prices.
But, in BofA’s view, a potential reopening may be arriving in October if China signals an easing of virus policies, noting jet-fuel demand could come off depressed levels.
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