Bank of America: Oil demand on the rocks

Oil prices face downward pressure due to a surge in global inventories and slowing demand growth, according to a note from Bank of America on Monday.

"Observed oil inventories have risen 1.7 million barrels per day (b/d) since mid-February, driven in part by softening demand growth," the note highlights.

This significant inventory build comes after a period of heightened geopolitical tensions that had initially shifted market focus away from fundamentals.

BofA analysts point to a clear deceleration in global oil demand growth. "Global oil demand growth decelerated to 890k b/d in 1Q24 YoY, and data suggest consumption growth likely slowed further in 2Q," adds the bank.

They explain that this slowdown is evident in both OECD and non-OECD countries, with US gasoline and diesel demand falling year-on-year in the second quarter.

While supply growth contributes to the surplus, BofA emphasizes the role of weakening demand. The report warns that "oil will buckle if rapid inventory builds persist." This could lead to lower prices and pressure on refinery margins, particularly in the Atlantic Basin if new capacity comes online.

Looking ahead, the BofA report acknowledges the potential for a price rebound in the third quarter if certain factors materialize. These include stricter production cuts from OPEC+, a seasonal rise in demand, and potential manufacturing or stimulus-driven growth in China.

However, the report concludes that "if weak balances persist into 3Q," oil prices are likely to remain under pressure.