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Oil could hit $70 next year but expect another plunge soon, says BoA analyst

Oil may be wobbling around the $40 a barrel mark, but one strategist has told CNBC that crude is only heading higher in the near term but in the years to come, there'll be wild swings.

"We're seeing a bottom right now for the second half of the year," said Francisco Blanch, the head of global commodities and derivatives research at Bank of America Merrill Lynch, the corporate and investing arm of the American bank.

"We think what's happening in the market is very seasonal. Supply is actually going down pretty quickly, demand is moving higher, and this is going to move the market into a deficit."

This will actually be a "multi-quarter deficit", according to Blanch, who believes it will push prices "quite a lot higher" and expects the commodity to hit a peak of $70 a barrel next year.


WTI drops lower

Several analysts have spoken of a rebalancing in the oil market for the second half of the year, which is expected to take prices higher. However, so far this has failed to materialize, leaving some market-watchers surprised over recent weakness.

Both Brent and WTI dropped lower on Thursday morning. This came after data on Wednesday showed crude inventories jumped by 1.4 million barrels in the last week, according to the U.S. Energy Department. Reuters reported the build-up in stockpiles brought reserves to an all-time seasonal high of 522.5 million barrels.

The commodity saw a rally in the spring but is still well below highs seen in mid-2014 when the price of oil was trading at around $115 a barrel. OPEC's reluctance to cut output has been seen as a key reason behind the fall, as well as weak global demand, a strong dollar and booming U.S. oil production.

Saudis 'very happy'

oil pump derrick gas
Eric Kounce | Wikipedia

"Historically the Saudis will have been acting as a swing supplier. So they would have been in the market and out of the market, now they just don't want to do that, they want 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," Blanch told CNBC.

The analyst believes that investors are going to see the oil price trading in very wide ranges, with $25 or $30 a barrel for oil a possibility over the course of the next three or four years. But Blanch also suggests we could see probably see $80 or $90 a barrel with the market being so volatile.

"I think the Saudis are very happy with that scenario because it's going to enable them to grow their production base. Remember their production cost in $10 a barrel, but they have all these government expenditures that they have to meet," he said, adding that their breakeven price is around $80 a barrel.

CTAs an option?

This volatility means it's likely to be rough for retail investors. Analysts suggest that trading the equities of oil majors might not be the best strategy. Instead, Paul Gambles, the co-Founder of MBMG Group and an advisory board member of IDEA Economics, told CNBC that commodity trading advisers (CTAs) are way of making money out of the oil price.

CTAs are described as managed futures funds, or hedge funds that use computer programs to follow trends in the market. Gambles highlights that they are "not always reliable" but added that there are "very few commodity stocks for retail investors."