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One major factor could put a cap on the rebound in oil prices

Highway traffic
Tim McCaig | E+ | Getty Images

This month's moderate rebound in the oil price is likely to cool next year, according to analysts at Bank of America Merrill Lynch, who predict demand from developed nations to contract in 2017.

"Petroleum demand in OECD (Organization for Economic Co-operation and Development) countries will likely remain a drag on global oil markets next year," a global commodity research team, headed Francisco Blanch, said in a note Friday.

The bank expects demand from the OECD, a group of 35 developed nations, will grow by 200,000 barrels a day (b/d) this year but project a 120,000 b/d contraction next year.

While a big part of 2016's demand is down to Americans driving over 3 billion miles this year, BofAML expects demand to fall off, in part due to big gas-guzzlers being replaced by more efficient vehicles.


OECD demand to fall

"OECD buyers still favor larger vehicles but fuel efficiency gains loom ... Other OECD regions will likely move back to structural declines. Fuel efficiencies in Europe are already offsetting miles driven, and the ongoing return of nuclear plants in Japan should bring down oil demand," BofAML said in the note.

The world is expected to consume less oil next year and the BofAML outlook tallies with many predictions from other organizations. Forecasts by the International Energy Agency (IEA) estimate global oil demand growth will slow from 1.4 millions of barrels a day in 2016, to 1.2 millions of barrels a day in 2017. OPEC see 2017 demand growth at 1.15 million barrels a day, after an expected average of 1.22 million barrels a day this year.

Bank of America Merrill Lynch's global oil demand projection is the same as the IEA at 1.2 million barrels and sees Brent prices averaging $61 a barrel next year and touching $70 a barrel by the end of the second quarter of 2017.

Saudi Arabia tempers freeze

The price of WTI sank lower Friday and traded at $47.16 a barrel by 11:00 a.m. London time. This was on the back of comments by Saudi Arabia's energy minister who tempered any chances of a production freeze by OPEC at its next meeting.

However, further comments on Friday morning gave investors a lot more to chew on. Asked about the possibility of an agreement on freezing production levels, OPEC Secretary-General Mohammed Barkindo said "nothing is impossible in the current situation," according to Reuters who cited the London-based newspaper Al-Hayat.

Elsewhere, Iran's Oil Minister Bijan Namdar Zanganeh was quoted saying the country would help other oil producers stabilize the world market so long as fellow OPEC members recognize its right to regain lost market share, according to Reuters who credited the news agency SHANA.

Car sales in EMs

Oil prices are up around 23 percent year-to-date after a dramatic plunge since the middle of 2014. 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.

With weaker demand in developed nations, emerging markets are likely to pick up the slack. Bank of America Merrill Lynch see emerging market (EM) oil demand expanding by 1.3 million barrels a day in 2017, slightly above the 20-year average.

"In our view, a combination of lower funding costs in local currency and in external debt should feed into faster credit creation and economic activity in the emerging world," the team said in the note.

"In fact, the negative interest rate environment in Europe and Japan, coupled with a dovish (Federal Reserve), could even translate into a secular growth story for EM oil demand. At present, car sales continue to expand across key EM countries, with India and China posting year-on-year growth figures of 12 and 10 percent respectively."