Citigroup Sees Oil Surging $10

Citigroup Inc. joined Goldman Sachs Group Inc. in backing commodities, saying it is the season to have faith in raw materials, and oil will probably rally to the mid-$60s by the end of the year, up nearly $10 a barrel from current prices.

While US 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, World Oil reported.

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 oil 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 US-based banking and financial services company.

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 drawdown, 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 supply 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 US West Texas Intermediate oil to average $62 a barrel and global benchmark Brent crude to average $65 a barrel in the fourth quarter.

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 US 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.