Global GDP in USD terms stagnant: BofA Merrill Lynch

Macro Outlook
♦    Global GDP in US Dollar (USD) terms at market exchange rates is stagnant. China’s GDP is changing, with services overtaking industrial activity as a driver of growth. US Republican win means stronger USD, higher rates, more trade barriers and reduced US oil supply restrictions.
♦    With the elasticity of trade to global growth down to 1 compared to 2 prior, protectionist policies could hurt oil demand.
♦    Fed tightening cycles and a strong USD do not bode well for oil, as rising US rates and flatter yield curves hurt EM demand.
WTI and Brent crude oil
♦    Opec agreed to cut crude oil output by 1.2mn b/d with key non-Opec producers indicating a 558k b/d curb, a first since 2001. Country quotas and an independent production monitoring committee are also part of the deal, so we expect firmer compliance.
♦    Global oil output was unchanged YoY in 2H16, as Opec growth offset again non-Opec field decline rates of 5 per cent. Non-Opec supply contracted by 910k b/d last year and we project a decline of 30k b/d this year, compared with an average 20-year expansion of 710 k b/d.
♦    We see shale oil output bottoming out in 1Q17. The Permian Basin is set to lead the output recovery as prices rise.
♦     The crude curve moved into a humpback shape, as the oil market is set to go into deficit but stocks remain exceedingly high. Given the ongoing forward selling from US producers, this shape could persist in 1Q17 until the overhang is partly cleared.
♦    2017 global oil demand growth will average 1.2mn b/d in 2017 while supply is roughly unchanged, resulting in a 2017 Brent price of $61.
♦    OECD demand will grow by 80k b/d this year as Americans drive more than 3tn miles, but we project flat OECD demand in 2017. Yet we see EM oil demand expanding by 1.2mn b/d in 2017 but acknowledge downside risks on the back of higher US rates.
♦    Opec’s action won’t propel prices much above our $70 mid-year target. Longer term, we estimate global oil demand will increase by 1.2mn b/d per annum over five years at $55-$75, and by 1.7mn b/d at $30/bbl.
♦    Peak global oil demand lies beyond 2050 if oil stays below $100, as transport demand offsets efficiency and substitution. Faster EV adoption or efficiency gains, eg, due to higher oil prices, could alter this path and bring peak demand by 2030.
Atlantic Basin oil products
♦    Refining margins have rebounded from their September lows across all regions on planned and unplanned refinery outages. Yet we now see margins falling as refining costs structures rise and global crude stocks rebalance faster than product stocks.
♦    Also, we project CDU capacity additions globally of 960 and 860 thousand b/d in 2017 and 2018, and remain bearish distillate.
♦    While the demand bounce in 2010 was cyclical and diesel-geared, today’s petroleum demand is consumer and thus gasoline-geared.
US natural gas
♦    Gas prices had a phenomenal run in 2016 and recently reached as high as $3.70/MMBtu. Looking into 2017, we see US nat gas balances tightening rapidly on falling production and strong structural demand growth, so we reiterate our forecast for 2017 at $3.50/MMBtu. We believe HH nat gas prices could briefly break $5/MMBtu this winter under slightly colder-than-normal weather.
♦    Trump presidency presents some downside price risks as it could speed up pipeline infrastructure, allowing for a faster supply expansion.
♦    Spot LNG prices surged to finish 2016 at $9.50/MMBtu on higher crude prices, restocking, and a cold start to the winter in Asia.
♦    Yet we remain bearish LNG due to weak fundamentals and see spot prices falling from here, particularly against crude oil.
♦    Also, the recent spread widening in Asian vs European LNG prices to $3.50 may reverse soon as restocking in Asia slows.
Thermal coal
♦    A mandated 10 per cent output cut by the Chinese government this year is mostly behind the recent 50 per cent uplift in thermal coal prices.
♦    Global coal inventories are low, so a further spike in seaborne prices from current levels is possible under a cold winter. Still, 95 per cent of seaborne producers now cover cash costs and can react within two quarters, so we are bearish on coal prices in 2017.
[BofA Merrill Lynch Commodity Research Themes and Outlook]