OPEC’s production agreement looks solid but the upside for Brent and WTI is capped at around $60 a barrel according to Bank of America Merrill Lynch’s commodities analysts Francisco Blanch and Max Denery.

OPEC’s production agreement has attracted plenty of criticism since it was announced last week. The deal marks the cartel’s first decision to cut crude output since 2008, marking a clear turning point in cartel politics. However, it remains to be seen how the new quotas will be implemented and if the non-OPEC countries (namely Russia) will comply with requests to cut output

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Blanch and Denery believe that the agreement will hold firm. Specifically, in a research report published earlier this week, the duo writes:

“OPEC’s decision to cut crude production, a first since 2008, marks a clear turning point in cartel politics: individual country quotas have been allocated to all members, an independent production monitoring committee has been established, and it appears the world’s largest crude oil producer Russia has committed to join the cut. As a result, we expect the announced 1.2mn b/d OPEC production cut and the additional non-OPEC output curb of 600k b/d (half of it coming from Russia) to result in a faster oil inventory normalization process.”

Crude Oil Prices will be kept down as US producers return

The country quotas and an independent production monitoring committee appear to seal the deal here for the analysts at Bank of America. Based on the production cut, they expect the oil market to enter a deficit soon as the first quarter of 2017.

Nonetheless, despite the projected market deficit, Blanch and Denery are not predicting a sudden spike in oil prices anytime soon. In fact, the duo expect oil prices to be capped at around $60 a barrel over the next 12 months due to demand and supply factors. One the most significant economic drivers that could weigh on oil prices are US interest rates. Bank of America’s research shows that based on past performance, a steepening yield curve could send Brent prices lower by as much as 30% and WTI prices lower by 20%.

“What are the main downside risks to our constructive oil price view? First and foremost, we continue to expect annual global oil demand growth to average 1.2 mn b/d, but we are concerned about higher US interest rates and a disorderly CNY depreciation. Second, there is a chance that Russia or various OPEC members do not comply with their commitments, a risk that has decreased with the individual country quota and third-party production verification elements. Third, it is also possible that non-OPEC ex Russian crude oil production recovers faster than we are currently expecting. Whether it is easier regulations in the US or continued production efficiency gains, it is worth keeping in mind that technology is at the heart of this oil price war…continue to expect Brent to average $61/bbl and WTI to average $59/bbl. Note that our price expectation embeds a sequential 500k b/d US crude production recovery to 9.2 million b/d by the end of 2017.”