Citigroup Inc. joined Goldman Sachs Group Inc. in backing commodities, saying it’s the season to have faith in raw materials and oil will probably rally to the mid-$60s by the end of the year.
While U.S. shale output may come “roaring back” amid higher crude prices, production curbs by OPEC and its allies should help offset that increase over the next six to nine months, Citi analysts including Ed Morse and Seth Kleinman wrote in an April 17 report. The producers need to extend their deal to cut supplies through the end of the year amid concerns that Russia is lagging behind on its pledged reductions, the bank said.
While the historic agreement between producers that went into effect Jan. 1 “induced a euphoric and unsustainable surge” in bullish bets by investors, that also set the stage for an inevitable sell-off as record fourth-quarter OPEC output and oil stored at sea moved to onshore sites, according to Citigroup. Goldman Sachs has also made similar comments, saying ample inventories that have undermined the output cuts are set to shrink and calling for more patience from the market.
“With a continuation of the OPEC and 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 analysts wrote in the note. Still, increased supplies from producers in the fourth quarter of 2016 is now “a dark cloud hanging over the market,” and a failure to extend the output agreement would send prices “precipitously lower,” they said.
The bank expects U.S. West Texas Intermediate oil to average $62 a barrel and global benchmark Brent crude to average $65 a barrel in the fourth quarter. WTI was trading 30 cents lower at $52.35 a barrel on the New York Mercantile Exchange at 10:34 a.m. London time on Tuesday. Brent on the ICE Futures Europe exchange was down 35 cents at $55.01 a barrel.
Supply Surge
The production-cut agreement spurred a change in market structure that meant traders had less incentive to store oil at sea, prompting the flow of supplies floating on ships to onshore sites. That set the stage for boosting U.S. inventories to a record in the first quarter of 2017, the bank said.
This gain and a surge in output by the Organization of Petroleum Exporting Countries in the fourth quarter had an effect that would “ultimately obstruct and for a period of time reverse the very rebalancing they were trying to accelerate,” the analysts said. The bank expects U.S. liquids output to grow year-over-year at 1 million barrels per day or more by December.
The drop in oil prices during March led declines across commodities, according to Citigroup. It estimates commodity assets under management grew about $45 billion in the first two months of the year but gave up $35 billion during the selloff in raw materials in March. Investment inflows should increase in the second quarter, the bank predicted.
“Do commodities need a bit of a prayer to rebound in ‘17? Probably not,” the analysts wrote. “Commodities stumbled through the first quarter following what was clearly the healthiest year for the sector since the decade began. In retrospect part of the sell-off toward the end of the last quarter was too much froth in critical subsectors like oil, copper and iron ore. But signs of better performance are increasingly clear, despite major risks.”
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