Oil set to balance, natgas may surge in Q4: Analyst

Bullish bet on nat gas

Oil prices are set to head higher as global crude oil inventories appear poised to balance for the first time in eight quarters during the final months of 2015, Bank of America Merrill Lynch's Francisco Blanch said Thursday.

The market was oversupplied with 2 million barrels per day of oil throughout the first half of 2015, Blanch said in a recent note. But after a build of 540 million barrels during the last two years, the market is set to turn, he added.

"That's going to be a big event, which I think is going to support the price of oil into year end," he told CNBC's "Power Lunch."

Blanch now sees U.S. crude at roughly $50 a barrel and globally traded at $55 by year end. U.S. crude has consolidated around $45 in recent weeks, and Brent has remained rangebound between about $47 and $49.

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In a widely cited note issued last month, Goldman Sachs projected U.S. crude would end the year near $40 per barrel. It could potentially fall as low as $20 per barrel if production declines too gradually and crude surpluses surpass storage capacity.

Blanch said he believes it's highly unlikely oil will fall to $20 a barrel.

Merrill's chief global head of commodities research said in his note that global oil demand growth is increasing at the second-strongest pace in more than 10 years. At the same time, supply has crept lower as U.S. producers cut capital expenditures amid a protracted commodity price downturn.

The party may not last very long, though, Blanch told CNBC.

"We are very worried about the first half of next year, because we'll still see inventory builds in the next refinery maintenance season, but again, it's something we will worry about once we go past December," he said, referring to the seasonal periods when refineries shut down to service their facilities.

During those periods, crude inventories tend to build as refinery demand drops off.

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Blanch also sees natural gas surging about 40 percent to $3.50 per MMBtu into the end of the year as demand for the beaten-up commodity builds in the coming quarters.

That price increase will be driven by exports to Mexico, a big ramp up in industrial demand, and the construction of liquid natural gas plants in the American Southwest, he said.

On Thursday, natural gas futures fell to a three-year intraday low on heavy surpluses. It was down 3.1 percent at $2.445 shortly after 2 p.m. EDT.