Wall Street Keeps Faith in Oil Recovery Even as Prices Drop

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  • Goldman, Morgan Stanley, Bank of America and Citi stay bullish
  • OPEC cuts just need more time to drain bloated oil inventories

Oil Could Be Dragged Below $45, Says Jim Bianco

Prices have sunk, stockpiles ballooned and doubts about OPEC’s effectiveness grown, yet Wall Street hasn’t lost faith in oil’s recovery.

Crude plunged below $50 a barrel in New York last week on signs that OPEC’s production cuts aren’t clearing a global glut quickly enough, and that U.S. shale drillers are ready to fill in any shortfall. Nonetheless, Goldman Sachs Group Inc., Morgan Stanley, Bank of America Corp. and Citigroup Inc. say they’re still confident prices will climb by the end of the year.

Given a bit more time, the world’s bloated oil inventories will decline as production cuts by the Organization of Petroleum Exporting Countries and Russia take effect, while fuel consumption remains strong, the banks predict.

“The outlook is no less bullish,” said Seth Kleinman, global head of energy strategy at Citigroup, who sees crude exceeding $60 a barrel later this year. “Bringing oil inventories down is a messy process, but the OPEC cuts are real, demand in Asia is decent and ultimately the market is tightening.”

There are plenty of reasons to doubt the bullish case.

Despite OPEC’s unusually strong adherence with its own targets, U.S. crude inventories are near record levels, the nation’s production at a one-year peak and the number of drilling rigs has almost doubled since May. OPEC’s partners, including Russia and Kazakhstan, have lagged behind in delivering their promised cuts, and Saudi Arabian production rebounded last month.

Still, oil demand remains poised to overtake supply in the second quarter and start depleting global inventories, according to Goldman Sachs, which sees U.S. benchmark West Texas Intermediate topping $57 a barrel in three months.

“The oil market re-balancing is still progressing,” Jeff Currie, head of commodities research at Goldman Sachs in New York, said in a report on March 14. In a note two days earlier, Currie said “the market needs a little patience” for the effect of OPEC’s cuts to kick in.

WTI rose 0.7 percent to $49.18 a barrel as of 8:45 a.m. in New York on Thursday, while Brent added 0.6 percent to $52.12.

U.S. crude prices will climb to at least $64 a barrel in the third quarter as the surplus begins to disperse, Francisco Blanch, head of commodities research at Bank of America, said in a report on March 10.

The four banks confirmed they’re sticking with their forecasts, even as prices dipped further at the start of this week. The bulls’ case received a boost on Wednesday, when Energy Information Administration data showed U.S. crude inventories declined for the first time in 10 weeks. The rebound in U.S. drilling will slow down before output can make up for OPEC’s reductions, according to Morgan Stanley, which sees Brent reaching $62.50 a barrel by the end of the year.

“The case for further re-balancing in the rest of the year remains robust,” said Martijn Rats, a managing director at the bank.

(Updates with oil price in ninth paragraph.)
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