Citi Sees Brent Oil at $70 a Barrel by End of 2017

Analysts also expect copper to hit $7,000 a ton this year

By Barbara Kollmeyer, MarketWatch

If commodity bulls aren’t feeling the love in 2017 so far, they may get closer after Citigroup threw out a couple of upbeat calls on oil and copper this week.

“Citi retains its bullish view on both crude oil and copper for 2017, seeing Brent potentially touching (around) $70/bbl. and LME copper possibly trading as high as $7,000/ton by year-end,” said analyst Edward Morse, global head of commodities research at Citi, and the team at Citi in a note to clients Tuesday. In both cases, analysts attribute the march to higher levels to “rapid rebalancing over the course of the year.”

And as well, investors who have commodities in their portfolios are adding a diversifier, given the fact major commodities are no longer tracking solid positive or negative correlations with equities, bonds and the U.S. dollar, said Citi. Statistical correlations represent an asset’s trading relationship with another asset. Positive correlations imply those assets are moving in the same direction, while negative correlation indicate they are trading in the opposite directions.

Citi’s upbeat assessment, at least on the energy side, is good news for hedge funds and money managers, who have been placing record bets on the side of oil prices going higher. Last week, they increased their net long position in Brent oil to the highest since records began in 2011, while in the U.S. it’s been the same story.

Citi lifted its short-term oil forecast for Brent by $5 to $55 a barrel in the first quarter of 2017, and $56 a barrel in the second quarter, an increase of $2, partly because investors are sticking to those bullish bets. Morse said they generally expect Brent to stick to a $60 to $65 a barrel range this year.

For U.S. oil prices, Citi analysts expect an average $53-a-barrel in the first quarter, $54 in the second, $57 in the third and $62 by the final quarter of 2017.

But the bank is not alone in the bull camp. Phil Flynn, senior market analyst at the PRICE Futures Group, said they have been targeting $73-a-barrel for U.S. crude and $71-a-barrel for Brent since January. “Not only are we seeing historic compliance on OPEC production cuts, we expect demand growth globally will exceed expectations,” he said in emailed comments.

“We saw last year as a generational bottom as the historic cuts in capital expenditure will take its toll on output. Shale will recover, but will fail to replace OPEC cuts in the short term and more traditional energy projects in the long one,” Flynn added.

The upbeat forecast from Citi comes both Brent and West Texas Intermediate oil shot higher on Tuesday, with U.S. oil prices trading at 19-month highs. Those gains were spurred by OPEC Secretary-General Mohammed Sanusi Barkindo who told a London conference that he expects to see a higher level of deal compliance in coming months from nations inside and outside the cartel.

At International Petroleum week in London, where Barkindo appeared, Qatar’s oil minister Mohammed Saleh Al Sada said the OPEC output agreement had a huge impact on price direction:

A risk to its forecast, said Citi , is if investors start to bail on those bets on higher prices, which could trigger some “fickle repositioning.” And beyond 2017, Citi sees crude weakening beyond 2017 due to expected growth of short-term supply such as U.S. shale oil. Prices fell last week as the market was torn between reports that OPEC could extend a pact to cut production by six months, and signs of higher U.S. output.

Read: Why oil experts think OPEC’s U.S. headache won’t go away this year

Baker Hughes (BHI) data last Friday showed a fifth straight weekly rise in the number of active rigs drilling for oil, while the latest data from the U.S. Energy Information Administration showed that domestic crude stocks hit the highest weekly total on record.

Shiny copper: The case is less iffy for copper prices as the metal is “tied to longer-term supply dynamics, which include not just issues related to mobilization of capital but also to a lack of a pipeline of discoveries of richer ores,” said Citi’s Morse.

In a note dated Feb. 19, Citi said copper prices could sail above $8,000 a ton before the end of the decade, citing bullish seeds planted by stronger-than-expected demand from China and positive price benefits from the election of U.S. President Donald Trump. But as well, a “dramatic” capital expenditure crunch in copper mining since 2012 has gutted the copper project pipeline for much of the remainder of the current decade.

“The resulting period of deficit is, in our view, setting the market up for the most sustained price rally since 2010,” said Citi analyst David Wilson, director of metals research and strategy and his team in a separate note.

Courtesy of MarketWatch