$70 Crude Inevitable, Even Though Citigroup Says Fuel Oil Demand has "Dropped Off the Planet"

Even though oil demand is down and prices will continue to be in the doldrums for the foreseeable future, neither Citigroup Inc. nor Pimco experts think this is necessarily a bad thing; in fact, they suggest the circumstances are paving the way for a substantial upside.

Edward Morse, global head of commodity research for Citigroup, told Bloomberg Surveillance that although fuel oil demand "has dropped off the planet" and diesel demand "has flattened out," he believes that on the whole, "oil demand has been pretty robust given the global economy."

Morse added that demand is rising more than 1 million barrels per day (bpd) annualised, "and we don't see that dropping much even if China sputters more."

Plus, while China's resiliency as a superpower may have been grossly exaggerated, its current level of economic activity is anemic only when compared to its past performance: "China is currently making 2.6 million cars a month, and that means gasoline demand has got to go up a good 8 percent no matter what," Morse reasoned.

Richard Clarida, global strategic advisor for Pimco, shared Morse's optimistic outlook: "We've been in a muddle-through ho-hum world for five years and it's the most likely outcome for the next year," he said, but quickly added that the fall from $100 to $30 in oil prices is a "modest positive for the global economic outlook."

Presumably, any positive for the global economy should also be good news for shipping.

Morse summarised his thoughts by assuring viewers that oil at its current price level "is not sustainable" given impending demand, and that an anticipated drop of 1.3 million bpd of U.S. shale production will lead to an inventory draw and a market rebalance.

He concluded that the level of prices "is bound to go back to the $70 range."

Morse's optimism is in marked contrast to Citigroup colleagues who, earlier this week, released a report suggesting a refinery-driven correction is forthcoming, stating that  "Refinery margins are under pressure due to falling gasoline cracks as strong gasoline demand growth has been met by even stronger refinery supply."