Brent crude could reach US$60, Citi report says
Cautions OPEC curtailment must continue
• Brent oil prices could rebound above US$60 per barrel this year as the market rebalances and large volumes of crude are withdrawn from storage, says a new report from Citi Research.
The report, released Monday, by Citi’s Edward Morse and other analysts says the oil market is ready for “a hefty draw that should take Brent to over $ 60 per barrel, but producers will have to extend their production agreement through yearend.”
When producers from the Organization of the Petroleum Exporting Countries and non- OPEC countries such as Russia slashed their current and ongoing production agreement last year by a combined 1.8 million barrels per day, oil prices rallied by US$10 per barrel.
However, while the agreement was triggered by a rational set of good intentions, it “just missed paving the road to hell” for OPEC as rival producers raised their output, Citi said.
The Citi report said that rally may have overshot equilibrium oil prices and the first quarter of 2017 “brought markets back to reality as the unintended consequences of the production cut exacerbated market oversupply.”
One of those unintended consequences was that Canadian and American energy companies hedged t heir production at higher oil prices at the time, accelerating their drilling plans and “guaranteeing a surge in U.S. production growth from the beginning to the end of 2017 of at least 800,000 bpd.”
Both Brent and West Texas Intermediate oil price benchmarks declined over the course of the first quarter — to below US$ 52 per barrel for Brent and US$ 48 per barrel for WTI — but have recently rallied.
Brent crude rose 74 cents to settle at US$55.98, not far from the one- month high of US$56.08 reached on Friday. U.S. crude was up 84 cents to settle at US$53.08.
Citi’s report said that Brent oil prices are set to rise over US$ 60 per barrel this year as long as OPEC countries agree with non- OPEC allies to honour their output cut.
It also says an extension is needed “to avoid a credibility problem that is already emerging with lagging Russian output curtailment” and “failure to extend could push prices back down to the low $40s by year-end.”
Russia’s Energy Minister Alexander Novak told Bloomberg News on Friday that his ministry had spoken with oil producers about extending the deal with OPEC but said it was too early to decide on prolonging the deal.
“The higher the price of oil in the next year, the greater growth there will be of U. S. production, presenting a Catch-22 dilemma for OPEC and the non- OPEC countries working with them,” the Citi report said.
The bank forecasts U.S. oil production increasing between 700,000 and 800,000 bpd next year, and continued growth from deepwater oil formations and the oilsands.