Citigroup Backs Commodities for ‘17 in ‘Especially Bullish’ Call

  • Oil market ‘setting the stage for a bullish end to the decade’
  • Impact from supply cuts starting to show, bank analysts write

Oil Trades Near Two-Month Low

Forget Brexit, go for raw materials. Citigroup Inc. says that it’s bullish on commodities including oil in 2017 as the impact of the U.K.’s vote to quit the European Union fades away, global growth chugs along and with markets rebalancing investors plow more cash into funds.

“Citi is especially bullish commodities for 2017,” analysts led by Ed Morse wrote in an note received on Monday, two months after the New York-based bank said that raw materials’ markets had turned the corner. “The oil market is treading water for now, but the oil price overshot to the downside earlier this year and this is clearly setting the stage for a bullish end to the decade.”

Returns from commodities trounced those from other assets in the first half as the oil market showed signs of rebalancing, spurring a rally. The half ended with the U.K.’s vote to quit the E.U., boosting concern about the outlook for growth. Global raw material demand still continues to grow, helped by the U.S. and China, while supply cuts are showing in petroleum and North American natural gas, some base metals and farm products, Citigroup said.

‘More Sustainable’

“Unlike last year, when commodity markets rallied through the second quarter only to fall sharply come the third as oversupply persisted, this rally looks more sustainable as physical markets have tightened considerably,” the analysts wrote. “Global demand continues to grow at a moderate rate while the pullback in capital spending is reducing not just supply growth but total supplies across nearly all extractive industries.”

The Bloomberg Commodities Index, measuring returns on 22 raw materials, surged 13 percent in the first half after falling to the lowest in at least 25 years in January. That compared with the 3.8 percent loss in the dollar, while a gauge of global stocks was little changed in the six months.

Citigroup said that while the bear market in oil is now over, a bull market hasn’t yet begun. Brent crude surged 25 percent in the second quarter after a 6.2 percent rally in the first three months as a global glut showed signs of easing and U.S. supply fell.

“Prices are expected to resume their ascension in 2017 as the market rebalances further and this should be bolstered by deepening cuts in non-OPEC oil production,” the bank said. In oil, “the pendulum is clearly swinging from the bears to the bulls.”

Brent View

Brent crude is seen averaging at $52 a barrel in the second half before rising to an average of $60 in 2017, according to the bank’s base case. The energy benchmark traded at $46.26 on Monday, 24 percent higher this year.

The global oil market will be almost balanced next year as demand rises faster than production, while current oversupply is smaller than previously thought, the International Energy Agency said in June.

The U.K. vote in favor of quitting the E.U. last month roiled markets, torpedoed the pound and spurred a surge in demand for haven assets amid concern the ructions may impede global growth. Billionaire investor George Soros said the decision had spurred a crisis similar to the turbulence of 2007 and 2008.

“Citi economists see the damage to global growth from Brexit to be limited in extent and duration in 2016, while stronger growth from China and the U.S. should lift global growth for the rest of the year,” the bank said.

— With assistance by Jasmine Ng, and Martin Ritchie

Before it's here, it's on the Bloomberg Terminal.