Citi says 'this time is different' for oil

Thomson Reuters

Citigroup is “especially bullish” on commodities in 2017, the bank says.

“The oil market is treading water for now, but the oil price overshot to the downside earlier this year and this is clearly setting the stage for a bullish end to the decade,” Citi analysts, led by Ed Morse, wrote in a research note published on July 11.

There is a quite a bit of volatility in commodity markets, especially for oil, but global demand continues to grow at a steady pace. Prices have crashed on oversupply, but with oil production going offline, particularly in the U.S., the markets could over-correct, creating the conditions for higher prices next year.

More recently, the Brexit vote raised concerns about global growth and financial stability, but it will be forgotten as demand continues to soak up excess supply. To be sure, investors are wary of getting burned again after oil prices briefly rallied to $60 per barrel a year ago, which was followed by a renewed price crash.

But Citi says this time is different. “Unlike last year, when commodity markets rallied through the second quarter only to fall sharply come the third as oversupply persisted, this rally looks more sustainable as physical markets have tightened considerably,” Citi analysts wrote. “Global demand continues to grow at a moderate rate while the pullback in capital spending is reducing not just supply growth but total supplies across nearly all extractive industries.”

Oil prices will likely rise in the coming months, with a more sustained rally set for next year. “Prices are expected to resume their ascension in 2017 as the market rebalances further and this should be bolstered by deepening cuts in non-OPEC oil production,” Citibank said. “[T]he pendulum is clearly swinging from the bears to the bulls.”

Indeed, the U.S. continues to see production drop off. The latest data from the EIA shows that output fell by 194,000 barrels per day for the week ending on July 1. Weekly estimates are not always the most accurate, but the decline is surprisingly large. If true, U.S. oil production is down 1.2 million barrels per day from the April 2015 peak, with more declines expected.

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