A top commodities strategist is predicting the rise in oil prices has further room to run higher.

Francisco Blanch, managing director and head of global commodities at Bank of America Global Research, thinks European benchmark Brent crude will hit US$120 per barrel by mid-summer, an increase from US$91 as of mid-day Wednesday.

His thesis is based on three primary factors: demand recovery, supply constraints and low inventories.

Below are excerpts from Blanch’s interview with BNN Bloomberg on Wednesday on those arguments:


SUBSTANTIAL DEMAND RECOVERY

“As we get past this Omicron wave, which has been holding back travel, and we’ve seen that in gasoline demand but also jet fuel demand in the U.S. Globally, we’re going to see a lot of growth into the summer months.”

“If we get Iranian barrels, […] that would tank the rally and probably push [prices] down by a few dollars per barrel, maybe prevent a spike into the summer, but remember, more supply means demand will continue to grow unabated.”

“If global growth stays strong because there’s suddenly more oil, all that is going to happen is we’ll hit the wall a little later. So rather than hitting it in 2022, maybe we’ll hit it in 2023. U.S. demand is at record levels - people have a lot of money in their bank account and companies have a lot of money on their balance sheets.”


CONTINUED SUPPLY CONSTRAINTS

“OPEC+ is really failing to keep up with its production increase commitments. In January alone, they agreed to increase production by 400,000 barrel per day – they actually only increased it by 50,000 barrels per day. And the U.S. shale industry is still reeling from three bear markets in the last several years.”

“Ultimately, what we need to see in the commodity market is demand destruction because we just don’t have the supply across many commodities.”

 

CHONRICALLY LOW INVENTORIES

“The challenge is when commodities hit this wall where inventories are really low and demand overwhelms the available supply, prices shoot up for a particular market, it destroys demand and it comes straight back down. Perhaps you even create self-supply, although that’s pretty hard in some commodity markets.”

“What I vision, at least through this year, is a volatile cycle for the sector. The low inventory situation we have in oil is also applicable to natural gas, to agriculture commodities, to metals […], I think we have a lot of cash and liquidity around and remember, commodities are not very sensitive to the early innings of the interest rate cycle. I think once we get a little later in the game, we could potentially start to see a slowdown in commodity markets but we require several Fed hikes here for commodities to be negatively impacted.”