Oil price heading towards a floor 11/1/16Oil price heading towards a floor, but stay cautious short-term, argues BAML. Article by Steve McGrath| The oil price is heading towards a bottom, but its not quite there yet, according to latest research from Bank of America Merrill Lynch. The oil price has been heading south for nearly two years. The Brent benchmark, currently stands at 32.78 a barrel, having been at about $115 a barrel in June 2014, marking 12-year lows for the oil price. The reasons include a big increase in US oil production, record pumping by Saudi Arabia, and a demand slowdown thats mainly due to slowing economic growth in China. Chinas growth is continuing to slow, and the Organisation of Petroleum Exporting Countries of which Saudi Arabia is a part has been unable to agree on any production cuts, all of which means that oil prices are unlikely to recover meaningfully any time soon because markets remain oversupplied. However, there are a number of signals that point to oil prices finding a floor soon, say the commodities strategists at BAML. The conditions for a floor in crude oil prices are coming together: spot crude prices are nearing cash costs, a bumper US driving season is approaching, the CNY is finally starting to move towards fair value, shale production is falling, and WTI has now matched Brent, they write. Lastly, we still expect to see global oil demand expanding at a brisk pace on lower oil prices as Iranian barrels hit the market. This combination of factors will ultimately lead to a bottoming out of global crude oil prices in the first half of 2016 and a recovery into the summer months, in our view, they add. WTI is the other main global crude oil price benchmark, while CNY is the Chinese yuan, which has been dropping against the US dollar. One of the key factors affecting global oil markets in recent years has been the boom in US production after technology developed to allow producers to get oil and gas out of shale rock formations. While the oil price was high, this was economic, but as the oil price has fallen, it has become less so. Indeed, analysts say that the reason Saudi Arabia keeps pumping oil at record rates even though oil prices have plummeted is to force high-cost US shale producers out of business, thereby protecting Saudi Arabias market share. The strategists at BAML note that more US oil explorers and producers are now going out of business, with at least 20 filing for bankruptcy in the second half of 2015. Those that remain are reining in capital expenditure plans. Shale oil production is falling quickly. But as crude oil prices slip below $35 a barrel, producers are no longer worried about full cycle costs. A decline into the $20s would mean that many companies would not be able to cover operating cash costs, marking a possible inflection point for oil, they write. US oil company bankruptcies are running above financial crisis levels This all looks promising for the oil price, but the BAML strategists advise caution for the short term. They say a steady US dollar is necessary for an oil price recovery, and they are also worried about the increased animosity between OPEC producers Saudi Arabia and Iran and that Chinese authorities dont appear to have finished depreciating the yuan. Moreover, a warmer than normal winter in both the US and Europe has shaved off about 200 thousand barrels a day of demand in each region. Demand for middle distillates is contracting in China too, the strategists write. A combination of factors could still drive crude oil prices into a mid $20s scenario in the very short term given the extremely high inventories. Indeed, BAML has cut its oil price forecasts for 2016. The bank now expects the Brent oil benchmark to average $46 a barrel in 2016, down from its previous forecast of $50 a barrel, and WTI to average $45 a barrel, compared with the banks previous forecast of $48 a barrel.