Citigroup Predicts $45 Oil By The End of Next Year

by Ship & Bunker News Team
Wednesday July 25, 2018

Given everything from geopolitical tension to production issues routinely being debated as analysts try to decide where crude prices are heading, Ed Morse, managing director and global head of commodities research at Citigroup Inc. defied familiar bullish arguments and stated that Brent will fall back into a band between $45 to $65 per barrel by the end of 2019.

Moreover, he insisted that "The bull argument is based on faulty analysis," noting that demand for oil has continued to rise but supply can keep pace: that's because, among other factors, while capital spending has declined across the oil patch (which analysts say will ensure production strife in the future), capital efficiency has dramatically improved.

Morse said, "So far, those that have predicted cost reflation have been proven wrong, including in the shale plays."

He went on to point out that technical improvements are boosting oil production, further improving the supply picture, and that decline rates predicted by entities such as the International Energy Agency are overblown (for one thing, he thinks it's illogical to count oil production that doesn't decline – like Canadian oil sands production – and production from the Organization of the Petroleum Exporting Countries, which has shown a consistent ability to produce 35 million barrels per day (bpd) over a 50-year time period, or production that isn't refined.

As for the fear that the recent increase in output from Saudi Arabia and other countries to offset declining production elsewhere isn't sustainable (and therefore prices will shoot through the roof), Morse used simple math to argue that it would take the Saudis six months of delivering 15 million bpd to the market to exhaust its own spare capacity.

Still, worry is far more addictive than reason, and Ed Hirs, an energy economist at the University of Houston, gained a headline in Forbes on Wednesday by stating that if Iran undertakes just a partial blockade of the Strait of Hormuz in retaliation for the U.S. imposing sanctions against the Islamic republic, oil prices will soar above $200 per barrel.

That's because "if quantity supplied to the market is cut by 10 percent, the price of oil will increase by 250 percent; with oil currently at $70 per barrel, a disruption in shipping in the Strait of Hormuz would lead to a $175 a barrel price increase, for a total of $245 per barrel," wrote Hirs.

Interestingly, Hirs used the Forbes spotlight and his predictions of soaring prices to credit U.S. president Donald Trump for complaining that the U.S. has spent trillions of dollars and sacrificed thousands of lives to defend oil interests in the Middle East.

Hirs went on to note that while the U.S. has initiated a tariffs regime in the name of national security for U.S. steel and aluminum industries, it has excluded the oil industry from similar protection: "Why? This policy today would benefit our national security by lessening our dependence on OPEC; higher domestic oil prices will encourage more employment and encourage a faster transition to alternative fuels.

"Tariffs or import restrictions can eliminate the exposure to wild downward price swings and protect us from foe and friend."

Earlier this month, respected trader Daryl Guppy said technical analysis proves that crude is headed for a rebound rather than a correction; however, even his calculations showed an upside target for the crude trend continuation at only $76, a far cry from the triple digits many analysts think is the inevitable fate for crude in our world of geopolitical tension.