The winter fuels outlook for this year, provided by Citigroup’s commodity team, presents a distinct perspective on crude oil and petroleum products. While maintaining a bearish view that goes against the consensus, Citigroup highlights the potential for significant gains in the event of a polar vortex or geopolitical disruption.
In contrast to other investment firms like Goldman Sachs, Citigroup’s analysis diverges significantly. While Goldman Sachs suggests a favorable range of $80-$100 per barrel for Brent, Citigroup projects a more moderate price of $73 per barrel for Brent by the second quarter of 2024. Additionally, they believe that Brent may exit 2024 at $68 per barrel.
A key factor contributing to the differing outlooks is the calculation of supply and demand balances. Goldman Sachs anticipates an overall deficit in petroleum supply of 700,000 barrels per day (b/d) in the coming year, while Citigroup forecasts an average excess supply of 1.4 million b/d in 2024. This surplus is attributed to non-OPEC contributions from countries such as Argentina, Brazil, Canada, Guyana, and the United States.
Beyond the focus on crude oil, Citigroup emphasizes the plausibility of polar vortex events. They note that warm temperatures in the Arctic can weaken the polar jet stream, reducing its ability to contain Arctic air. Consequently, cold temperatures can spread into the mid-latitudes. Citigroup suggests that a warm forecast for the Arctic between December and February could potentially lead to polar vortex events during those months. Furthermore, there may be an increased likelihood of impactful storms akin to Winter Storm Uri, which occurred in 2021.
Low Worldwide Distillate Inventories Raise Concerns
The bank expresses concern over the low inventories of distillate products worldwide. Specifically, stocks in the Atlantic Basin are currently under 300 million barrels, with the U.S. East Coast region (PADD 1) experiencing a particularly low level of under 25 million barrels. This scarcity of supply is compounded by the steeply backwardated market structure, which hampers product movement. Furthermore, refinery yields of diesel are barely surpassing 30%, a decrease of approximately 2% compared to last year. The primary culprit behind these challenges is the diet of light sweet crude.
Changing Landscape for Diesel Vehicles in Europe
Citi, unlike most commodity houses, holds a more bearish outlook. While acknowledging the impact of the polar vortex, they highlight an additional factor contributing to their pessimism. The share of diesel vehicles in Europe is shrinking due to the increasing market penetration of hybrid vehicles and electric vehicles (EVs), along with some gains made by gasoline-powered cars. This shift in consumer preference diminishes the demand for diesel.
Industrial Slowdown on Both Sides of the Atlantic
Diesel demand largely relies on industrial activity, which typically accounts for 50% to 75% of overall demand. Unfortunately, both the United States and Europe are currently experiencing a prolonged mid-cycle slowdown in industrial activity. This factor further dampens the demand for diesel.
Geopolitical Risks in the Middle East
Although there are mentions of geopolitical risks in the Middle East, Citi assesses the potential risk of a widening conflict as low. Their base case scenario assumes that the conflict will remain contained.
Bearish Outlook for Natural Gas
In addition to their guarded view on crude oil and diesel, Citi predicts a bearish future for natural gas, aligning with Goldman Sachs’ viewpoint. European natural gas levels are projected to exceed 35% capacity by March, even under normal weather conditions. Furthermore, Citi forecasts that U.S. natural gas prices will remain at or below $3 per MMBtu in 2024.
Reporting by Tom Kloza; Editing by Michael Kelly.
