This year’s winter fuels outlook from the commodity team at Citigroup retains an out-of-consensus bearish view on crude oil and most petroleum products but says there is potential for explosive gains should markets experience a polar vortex or geopolitical upheaval.
Citi’s overall observations on crude are in stark contrast to those expressed Sunday from fellow investment house Goldman Sachs. Whereas Goldman sees a sweet spot range of $80-$100/bbl for Brent, Citi analysts project a $73/bbl price for Brent by second quarter 2024 and believe the benchmark may exit 2024 at $68/bbl.
Dramatically different supply and demand balances are calculated. Goldman sees an overall petroleum supply deficit of 700,000 b/d next year. Citi believes that supply will outpace demand by an average 1.4 million b/d in 2024 thanks to contributions from non-OPEC supply from Argentina, Brazil, Canada, Guyana and the U.S.
But beyond the crude oil considerations, Citi believes that a strong case can be made for polar vortex events. They observe that warm temperatures in the Arctic can often weaken the polar jet stream. That weakening cuts the region’s ability to contain Arctic air so that cold temperatures can move into the mid-latitudes. A warm December-to-February forecast for the Arctic might translate into polar vortex events in those months. Greater chances of impactful storms such as Winter Storm Uri in 2021 are also possible.
The bank is concerned about low worldwide distillate inventories, citing Atlantic Basin stocks that are under 300 million bbl, including a low level of under 25 million bbl in the U.S. East Coast region (PADD 1). The steeply backwardated structure of the market isn’t helpful for product movement and refinery yields of diesel are barely above 30% or about 2% beneath last year. The diet of light sweet crude gets the blame.
But beyond these polar vortex considerations, Citi is much more bearish than most commodity houses. It notes that the diesel share of vehicles in Europe is shrinking thanks to more penetration by hybrid vehicles and EVs as well as some gains for gasoline-powered cars. Industrial activity, which is credited with driving 50%-75% of diesel demand, is undergoing a prolonged mid-cycle slowdown on both sides of the Atlantic.
Geopolitical risk in the Middle East gets mentioned, but Citi sees a low risk for a potential widening of the war. Its base case is that the conflict remains contained.
While the view for crude and diesel is guarded, Citi sees a bearish future for natural gas, essentially concurring with the Goldman viewpoint. European natural gas is likely to be well above the 35% full level by March even with normal weather. U.S. natural gas prices at or below $3/MMBtu are forecast in 2024.
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, [email protected]; Editing by Michael Kelly, [email protected]
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