BofA Merrill Lynch: Q2 Brent crude to average $122 on Libya unrest

(Updated 10:45 p.m.) The average price for Brent crude oil this quarter will likely reach $122 per barrel (/bbl), Bank of America Merrill Lynch (BofAML) said in its Global Energy Weekly, revising its earlier forecast of $88 for the second quarter. “Global oil demand has been expanding at a breakneck pace in recent quarters, and now the political situation in Libya has reduced oil production by 1 million b/d [barrels per day]," the global investment banker said. Based on its additional forecast scenarios, “Libya will stay mostly offline for six months." BofAML also assumes that there would be limited damage to the oil infrastructure, with no further supply disruptions in the region, and with modest impact of the situation on global demand. “Under our upside risk scenario, Libya remains offline completely for 2011, we assume a range of additional supply disruption, and factor in sever demand destruction," BofAML said in its report. As such, BofA Merrill Lynch analysts see Brent prices, the benchmark for crude oil, averaging “between $125/bbl and $160/bbl…" In their downside risk scenario, the investment bank’s analysts said that “Libyan supplies come back in a month and there is no further turmoil in the region. Brent prices should average $100/bbl in 2011 under this setting." Impact on inflation For the Philippines as an oil importing country, higher crude oil prices would impact on inflation, said Justine Diokno-Sicat, senior lecturer at the University of the Philippines (UP) School of Economics. “To what extent? I just don’t know right now." In its latest report on the impact of crude oil prices on food and other commodity prices, Metropolitan Bank and Trust Co. said Wednesday Philippine inflation should peak close to 8 percent this October. Philippine inflation accelerated to 4.3 percent in February, a nine-month high, from 3.6 percent in January, exceeding the Metrobank’s forecast of 3.7 percent, said the bank’s research chief, Marc Bautista. This also means that interest rates will likely go up, according to the UP senior lecturer who is also a World Bank consultant on public expenditures. “We have been expecting interest rates to go up even before without the impact of oil prices. So, all the more this time," Diokno-Sicat said. The policy-setting Monetary Board is meeting later this month on prices and interest rates, and analysts expect that it will decide on adjusting the benchmark rates which have been unchanged since July 2009. Oil prices seen to drop The thing with the oil price was that most of the forecasts in the aftermath of winter were all below $100, in fact below $90, until the unrest in MENA entered the picture, said Jonathan Ravelas, market strategist of BDO Universal Bank. Now, Ravelas said there is a lot of adjustments going on and taking into account higher oil prices as an upside risk to inflation. “What’s the impact on interest rates? The question now is how high will the Monetary Board let interest rates go." BofAML also said, however, that the higher the price of oil gets, the more it will weigh against demand. “While supply disruptions have become a major focus for the markets, we also see higher prices impacting demand negatively this year," it said. Ravelas agrees. “If oil lingers at $110 levels, consumption will go down." According to a Reuters report, Brent crude oil rose 79 cents to $113.27/bbl Wednesday. — PE, GMA News