Citi Joins the Oil Bulls as Saudi Oil Exports Drop to 2015 Lows

Wednesday April 19, 2017

Following through on indications earlier this week that it was assuming a bullish stance on oil, Citigroup on Tuesday predicted that commodities overall will enjoy a bumper year in 2017, with crude soaring to the mid $60s by the end of December.

This comes less than 24 hours after Barclays, Prestige Economics LLC, and Again Capital expressing optimism about oil's near-term prospects, despite many nations pumping full out and numbers that suggest the supply and demand market is far from balanced.

Citi's last prognostication comes just as crude on Tuesday suffered a second consecutive day of losses, with Brent falling 26 cents to settle as $55.10 and West Texas Intermediate falling 24 cents to $52.41; the declines are said to be due to the U.S. Energy Information Administration's report, released Monday, showing that U.S. shale will grow by 124,000 barrels per day (bpd) in May, the biggest monthly increase in over two years.

Citi appears to be shrugging off the losses, and in a note its analysts state that "With a continuation of the OPEC/non-OPEC producer deal in the second half of 2017 and the expected associated inventory draw-down, we expect oil prices to move above $60 a barrel by the second half of the year."

The bank is referring to the Organization of the Petroleum Exporting Countries' production cutback initiative, now in its third month of implementation; the Citi analysts stress, however, that failure to extend the cuts to the end of this year will send oil prices "precipitously lower."

The analysts even suggest that the OPEC deal could offset any gains in U.S. shale output over the next 6 to 9 months.

Meanwhile, new data proves once again that the high compliance - and accompanying positive press - enjoyed by the OPEC initiative is due to Saudi Arabia maintaining a leading role in the cutbacks: the Riyadh-based Joint Organizations Data Initiative website shows that the kingdom trimmed exports to 6.95 million bpd in February, the lowest since May 2015, from 7.7 million per day in January.

The Saudis boosted production to 10 million bpd from 9.7 million a day in the same time frame, but this is within the quota established by OPEC and was used as fuel in power plants and other facilities.

While overall analysts are expecting a drop in crude inventories due to rising demand during the impending warm-weather months, not everyone is buying into the growing bullish sentiment: analysts at Commerzbank suggested in a note that OPEC can hardly be relied upon as the solution to long-term oil market problems: "The battle between the 'sheiks and the shale oil producers' is far from decided ... with all attempts by OPEC to achieve a lasting production deficit on the oil market being torpedoed by non-OPEC producers, first and foremost the U.S."

A similar sentiment was expressed Monday in the face of positive forecasts by Andrew Lipow, president of Lipow Oil Associates: he told Reuters, "While the Saudis and the Russians have been complying with their cuts, we've seen Iraq and a number of other countries produce more than their share of the quota.

"So that gives the market pause at how effective they're going to be at taking oil out of the market."