C Citigroup Inc

Citigroup's commodities team is not backing off its bearish outlook on oil.

In a report sent to clients on Thursday, the bank projected a "finely balanced" oil market in 2025, but sees the potential for Brent to drop to $55-$60/bbl by the second half of next year. It's the sharp pricing downdraft expected next year that qualifies as a "storm."

The report, which preceded Friday's crude rally of more than $2/bbl, suggests that OPEC+ member will comply with promised production cuts. But Citi believes it's almost certain that supply and demand balances will deteriorate, particularly next year.

The bank's base case expects OPEC+ to extend its first-quarter 2024 quotas for the full year. But even with those cuts, Citi projected a modest 100,000 b/d surplus with supply slightly outpacing demand. Any major disruptions in 2024 would probably inspire the cartel to release more oil. Saudi Arabia and Russia have about 2 million b/d of easily tapped spare capacity should there be a supply interruption in the Middle East or North Africa.

The bank's base case price target for Brent this year is $74/bbl, a downward revision of $/1/bbl. Citi said it expects Brent to average just $60/bbl in 2025, $10 below its previous projection. Its six-to-twelve-month target for Brent is just $72/bbl with the price of West Texas Intermediate forecast at an average of about $68/bbl.

The 2025 and forward projections are tied to Citi's view that supply gains will easily surpass growth in demand. The bank believes that even with OPEC+ cuts maintained through next year, there could be a 700,000 b/d daily surplus. If those cuts are discontinued, supplies could build by 1.2 million b/d, it added.

The bank's analysts recommended investors and commercial oil companies consider longer-dated insurance by hedging downside price risks over the next one to two years. A glance at the Brent futures' curve this morning shows prices over that period in the $73-$75/bbl neighborhood, well above the $55-$60/bbl price range the bank is projecting for the second half of 2025.

Citi's report maintained a "bull case" that puts a potential Brent move into the high $80s/bbl to possibly $90/bbl at 15% likelihood. Its "bear case, " which raises the possibility of crude prices in the $50s/bbl, was put at a 25% probability.

The bank's outlook is based on the assumption that global oil demand growth will slow from about 1.9 million b/d in 2023 to 1.3 million b/d this year and just 700,000 b/d in 2025. The analysts projected global GDP growth of 2.5% which ordinarily would imply 1.2 million b/d of demand growth.

But the growing presence of electric vehicles changes the calculus, the bank said. Of the 80 million cars sold in a typical year, about 30 million will be "new energy vehicles," a mix of battery electric, plug-in hybrid, and traditional hybrid vehicles, the bank said. Those vehicles are likely to displace about 500,000 b/d of traditional petroleum demand, according to Citi's projections.

This content was created by Oil Price Information Service, which is operated by Dow Jones & Co. OPIS is run independently from Dow Jones Newswires and The Wall Street Journal.

-Reporting by Tom Kloza, tkloza@opisnet.com; Editing by Jeff Barber, jbarber@opisnet.com

(END) Dow Jones Newswires

January 12, 2024 11:02 ET (16:02 GMT)

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