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Tom Kool

Tom Kool

Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com's Head of Operations

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Citi: Oil Is Overvalued By $50 Per Barrel

  • Citi's Ed Morse reiterated his bearish view on crude oil in an interview on Bloomberg.
  • Morse: Oil should be trading at around $70 per barrel.
  • Citibank revised its demand growth outlook down by 1.4 million bpd to 2.2 million bpd y-o-y.
Citi bank

Brent crude, trading Wednesday at over $116 per barrel, should be closer to $70, according to Citi’s global head of commodity research, Ed Morse, in an interview with Bloomberg.

Morse, which has been one of the most bearish pundits saw demand growth at 3.6 million bpd at the beginning of the year. Citing recession fears and economic slowdown, Citi is now estimating that demand growth for oil stands at 2.2 million bpd year-on-year, down 1.4 million bpd from the beginning of 2022.

Oil prices have surged some 50% since the beginning of the year, with Russia’s invasion of Ukraine and resulting Western sanctions roiling global energy markets. On Tuesday, a Reuters poll of analysts showed a consensus for Brent prices to average just over $107 per barrel in Q2, with some experts eyeing $130 per barrel in the aftermath of the EU’s partial ban on Russian imports.

But it’s all overblown, says Citi’s Ed Morse.

"I'd say it's more in the $70 range than it is in the $120 range," Morse told Bloomberg. "If you look at the fair value for oil, look at the flowing curve. It's exaggerated."

On Wednesday, oil prices continued to rise with the reopening of China’s key financial hub, Shanghai, after two months of lockdowns that had chipped away at fuel demand.

At the same time, more in line with Citi’s $70 oil valuation based on demand, the OPEC+ Joint Technical Committee (JTC) in a Wednesday meeting reduced its global oil demand forecast for 2022 by 200,000 bpd, now expecting oil demand growth to be 3.4 million bpd. This is the second month in a row OPEC has downwardly revised its oil demand growth projections.

Based on these demand projections, when OPEC+ meets on Thursday, it is unlikely to raise its production quotas.

Unnamed OPEC+ sources cited by Reuters said Wednesday that the group was on track to leave its existing, modest oil output increases in place due to spare production capacity issues. 

By Tom Kool for Oilprice.com

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  • George Doolittle on June 01 2022 said:
    Long $slb strong buy
    Long Hess Petroleum strong buy

    Oil prices are so high because the USA has oil Companies that simply are not run well if run at all. Presumably $unp Union Pacific Railroad is still very well run, though. If not there is $cp Canadian Pacific.
  • Mamdouh Salameh on June 02 2022 said:
    Analysts, investment banks and energy specialists have a tendency to pluck figures out of thin air with the objective of either impressing readers or promoting their research. Either way, they are overwhelmingly proven wrong most of the time. Citi’s Ed Morse is no exception.

    The geopolitical impact of the Ukraine conflict on oil prices has fizzled out after it became apparent that the conflict hasn’t led to any disruption of oil and gas supplies. Brent crude has gone down from $130 a barrel to $113 today leaving oil prices to market forces. And market forces are telling us that prices will remain sky-high well into the future because of robust global oil demand, tight market and a shrinking spare production capacity including OPEC+’s.

    Therefore, could Mr Morse tell us how he reached a figure of $70? He is projecting a demand growth of 2.2 million barrels a day (mbd) for this year compared to 3.4 mbd projected by OPEC+, the world’s most accurate reader of the oil market fundamentals.

    Moreover, the fact that prices of natural gas, LNG and coal are also surging is evidence enough of robust demand.

    I am starting to think that the bearish projections of Citi’s Ed Morse like those of the IEA and Rystad Energy are intended to depress oil prices for the benefit of the OECD members most of whom are Western consumers.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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