Wild Ride Ahead for Bunker Prices as Bank Predicts Volatility with $25-$90 Crude Spread Over the Next Few Years

Francisco Blanch, the head of global commodities and derivatives research at Bank of America Merrill Lynch

Oil trading in the extremely wide ranges of $25 to $90 per barrel is a distinct possibility over the next three or four years, says a commodity expert at Bank of America Merrill Lynch, with Saudi Arabia reaping huge rewards from the volatility.

Francisco Blanch, the head of global commodities and derivatives research at the bank, told CNBC that the market is currently at the bottom of a cycle and a dramatic swing is imminent: "Supply is actually going down pretty quickly, demand is moving higher, and this is going to move the market into a deficit."

Blanch added that the deficit won't last one or two quarters, but instead, "It's going to be a multi-quarter deficit: it could be 6, 8, maybe 10 quarters of deficit while we adjust supply and demand again into surplus, and that's going to push prices quite a lot higher.

"I think we're going to see as high as $70 next year."

Blanch went on to say that Saudi Arabia has abandoned its traditional role as a swing supplier and now wants "to create volatility, because they know that volatility leads to less investment, which effectively means they can take a larger market share down-the-line."

Covering all possibilities, the commodities expert warned investors that $25 or $30 per barrel is possible over the next three or four years, but also that market volatility could see it trade as high as $90: "I think the Saudis are very happy with that scenario because it's going to enable them to grow their production base."

Ship & Bunker data suggests that based on recent trends, crude in the $25-$90/bbl range could put the range for IFO380 bunkers in the primary ports as low as $100 per metric tonne (pmt), and as high as $500 pmt.

While few if any analysts think prices will climb so high so soon, many agree with Blanch's low-ball prediction, chiefly John Kilduff, partner at Again Capital, who has repeatedly warned of $25-$35 oil and a slower than expected market rebalance.