Oil Bulls Have Some Comfort on the Way: Citi

BofAML's Blanch: Buy This Oil Dip Ahead of Rebound to $50
  • Return of Libyan crude supplies is probably overstated: Citi
  • Force majeures on Qua Iboe, Forcados may last through August

While oil bears go “wild” at crude’s retreat to $40 a barrel, there’s some comfort on the way for the bulls, according to Citigroup Inc.

As prices plunge and are pulled below support levels amid concerns over swelling global stockpiles, some supply disruptions including those in Nigeria are set to persist and crude at $40 a barrel may spur demand, according to a report from the bank dated Aug. 2.

Crude has declined since early June and tumbled into a bear market amid speculation that ample inventories will blunt the effect of shrinking production and supply outages from Canada to Colombia. That’s after they rebounded from a 12-year low reached earlier in 2016. Still, the global disruptions that partly fueled the earlier price rally and the perception that a bull market had begun may increase next month, Citigroup said in its report.

Brent crude, the benchmark for more than half the world’s oil, traded at $42.14 a barrel on the ICE Futures Europe exchange at 11:01 a.m. in London. West Texas Intermediate, the U.S. marker, was at $39.83 on the New York Mercantile Exchange.

Libyan ‘Headfake’

While a deal in Libya between the Tripoli-based Presidential Council and guards at the OPEC member’s biggest oil ports may encourage bears, it’s “likely another headfake,” analysts including Seth Kleinman wrote in the note. The nation “has devolved into a genuine failed state, run by competing militias, and moving a state from the failed to the not failed column does not happen overnight or over months. It takes years.”

Libyan oil output is expected to remain at about 350,000 barrels a day, according to the bank. Output has dwindled from 1.6 million barrels before a 2011 revolt as various armed factions fought for control of the country holding Africa’s biggest oil reserves.

Force majeure -- a legal status protecting a party from liability if it can’t fulfill a contract for reasons beyond its control -- on Nigeria’s Qua Iboe and Forcados crude streams after attacks by militants on wells and pipelines may last through August, Citigroup said. Northern Iraqi exports may fall about 100,000 barrels a day this month after an Islamic State assault on the Bai Hassan field, according to the bank.

Global Inventories

The stockpiles of crude and refined oil that built up in industrialized nations during the years of oversupply stand at a record of more than 3 billion barrels, according to the Paris-based International Energy Agency. Traders struggling to sell cargoes are hoarding the most barrels on board tankers at sea since the end of the 2008-2009 financial crisis, the agency says.

Citi estimates that global oil inventories have increased by an average of 360,000 barrels a day in the first half of 2016, compared with an average gain of 430,000 barrels a day over the first-half periods over 2010-2014 and below the 1.5 million barrel average in the first six months of last year.

“Oil prices for the remainder of second-half 2016 have a number of hurdles to overcome, most notably the tempered outlook for refinery runs as a result of weak margins, which will further weigh on prompt crude demand and the sizeable excess of oil in storage,” the analysts wrote. “But oil at $40 a barrel is likely to spur investor, commercial and physical demand.”

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