A new report by Bank of America Merrill Lynch forecasts that oil prices could drop below US$100 per barrel in the second half of 2011.
The report argues that potential fiscal tightening in the US as well as Libyan supplies coming back on line later in the year will end the recent rally that has seen Brent crude hit over US$120 a barrel.
"With the first signs of demand destruction on the horizon and credit risks on the rise, we keep our view that Brent will average US$94 a barrel in the fourth quarter of 2011. In particular, we believe that the downside risks to oil prices will grow as EM yield curves continue to invert, QE2 comes to an end in the United States, and issues such as debt restructuring in the European periphery start to materialise," the report said.
The report sees oil being pushed around in a two-tier global economy. As developed markets continue to struggle with high levels of debt and disinflationary pressures, as emerging markets are experiencing fast economic growth and inflation.
"We continue to believe that any commodity demand drop in developed markets will be picked up by emerging markets over the longer term. Still, there is no shortage of downside economic risks in the world, and the emerging market/developed market growth imbalance is likely exacerbating them," the report stated.
The report said with limited oil supplies and a supportive demand environment in the short-run could see oil prices remain above US$100 this quarter and the recent dip in oil as a short-term buying opportunity.
