Oil prices will overcome the current trade-war gloom and push higher as investors put aside their temporary bearishness to focus on tightening supply fundamentals, according to Citigroup Inc.
The US lender sees Brent crude rising to $75 a barrel – around 4% above current levels – in the short term and possibly overshooting toward $78, Ed Morse, Citi’s global head of commodities research, wrote in a note dated May 20. Price declines since late April are an opportunity to go long, he wrote.
The growing pessimism around the US-China trade relationship will be short-lived as US President Donald Trump will probably seek a deal later this year to bolster his re-election chances, according to Citi. The potential hit to demand from the breakdown in relations between Washington and Beijing is distracting traders from the physical supply squeeze caused by sanctions on Iran and Venezuela, output risks in Libya and Russian contamination issues.
“This level of divergence between physical and financial conditions rarely lasts long and financials eventually reconnect to the physical market,” Morse wrote in the note. “Our economists are still cautiously optimistic that a trade war today will result in at least an interim trade deal this year.”
Trade-war uncertainty has contributed to hedge fund managers pulling back from the oil market, with the proportion of futures contracts they are holding near the lowest since 2016. Meanwhile, the supply backdrop is being reflected in Brent’s 3-month price structure, which is in the steepest backwardation – where prompt prices are higher than later-dated contracts – since 2014.
Brent the global crude benchmark, has retreated around 5% from a high in late-April, paring its gain this year to 33%.
The latest geopolitical disruptions are echoes of 2011 to 2013 when Libyan and Iranian barrels were pulled from the market, dramatically tightening the global crude balance, according to Citi.
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