Citigroup’s commodity research team believes that the recent surge in crude oil prices may be reaching its limit. They are advising traders to take short positions in both crude and refined products. According to the team, only a hurricane could disrupt what they see as a gradual decline in oil supplies.
August is typically the month when global oil demand reaches its peak. However, the researchers express doubts about recent analyses that point to tighter global crude supply from organizations such as the Energy Information Administration, the International Energy Agency, and the OPEC Secretariat.
For example, OPEC estimates a likely draw of 1.24 million barrels per day (b/d) in 2023, with a projected deficit of 1.59 million b/d next year. The IEA anticipates a draw of 1.26 million b/d this year, and a deficit of 460,000 b/d in 2024.
The EIA takes a more balanced approach but still expects stocks to fall about 100,000 b/d short of the demand in 2023, before transitioning into a surplus of 200,000 b/d in 2024.
However, Citigroup’s analysts anticipate much stronger supplies this year and next than these projections suggest. They foresee additional oil coming from non-OPEC countries as well as within the OPEC+ cartel.
The team calls for a stock build of 200,000 b/d in 2023, which would eventually transform into a significant surplus of 1.8 million b/d next year.
To maintain prices above $70/bbl, OPEC+ and other producers will need to implement additional cuts, as stated by Citigroup’s analysts.
After examining motives and production from various countries, the commodities team identifies flaws in the bullish narrative. For instance, Iran and Iraq each have projects that could add more than 1 million b/d of crude by June 2024. Additionally, Nigeria and Iran are expected to contribute another 500,000 b/d.
Furthermore, the bank mentions that Venezuela could soon achieve a “stable” production figure of 1 million b/d, while Nigeria might be able to increase its output to 1.7 million b/d next year. These aspirations could test the patience of Saudi Arabia, warns the team.
According to the report, relying solely on emerging market growth for demand growth is unrealistic as there is too little of it to expect markets to tighten.
In conclusion, Citigroup’s commodity research team expects the recent runup in crude oil prices to come to an end. They recommend traders to take short positions in crude and refined products. The team believes that the global oil demand peak in August does not align with the analyses from various organizations pointing to tighter global crude supply. Instead, they anticipate more robust supplies this year and next, coming from both non-OPEC countries and within the OPEC+ cartel. Maintaining prices above $70/bbl would require additional cuts from OPEC+ and other producers. Flaws in the bullish narrative have been identified, including promising projects in Iran, Iraq, Nigeria, and Venezuela. Finally, relying solely on emerging market growth for demand growth is considered unrealistic.
The Bank’s Analysis on Fourth-Quarter Demand
The bank has provided insights into the current state of the oil market, highlighting its belief that some recent demand assessments are inaccurate. It anticipates that fourth-quarter demand will be lower than that of the previous quarter.
Factors Influencing Demand Records
According to the bank, a significant portion of recent demand records can be attributed to a substantial increase in “other oils” by 586,000 b/d. However, it notes that mainstream demand for gasoline, distillate, and jet fuel has only experienced modest growth.
Brent Crude Price Projection
The bank cautions that the average price of Brent crude for the current quarter might not meet its projected target of $83/bbl. In the absence of hurricanes, they expect an average price of $78/bbl for Brent in 4Q and a range of $68/bbl to $77/bbl in 2024.
Wildcards and Chinese Crude Stockpiling
While Chinese crude stockpiling has the potential to impact global markets, the bank predicts that the country’s imports will reach 11 million b/d to 12 million b/d. This level will adequately meet refinery needs but remain below recent months’ import levels.
Weakening Refined Product Cracks
The bank suggests that refined product cracks might weaken in the future. While margins have been strong during the summer, they anticipate an increase in supply once the intense heat subsides.
Potential Improvement in Yields
The recent strength in distillate-rich crude has been a driving force behind the oil market, but the bank anticipates improved yields as more oil becomes available.
Financial Positioning Impact
Financial positioning is identified as a new factor that may cause trouble for high oil prices. The longs-to-shorts money manager ratios have recently skewed towards long positions, reaching 5.3 times the short positions. This exceeds the trailing two- and five-year averages, which could lead to long liquidation before the oil shoulder season.
