Citi blames price surge on Ukraine war, values crude oil at $70

Global investment bank and industry advisory firm, Citi Group has thrown support for the position of the Organization of Petroleum Countries (OPEC) on the surging crude oil prices, saying that the prevailing strong prices are not a product of fundamental market forces.

The group stated that the crude oil currently selling around $120 per barrel is overvalued, arguing that the commodity should be selling at about $70 per barrels if not for imbalances created by Russia’s invasion of Ukraine.

The Oracle Today also reports the Secretary General of OPEC, HE Dr Mohammed Barkindo as arguing that non fundamental factors outside market dynamics are behind the rising prices of crude oil. He explained that OPEC has no immediate control of the factors driving price movements in the market.

Dr Barkindo was responding to calls on the group and its allies to ramp up crude supplies to the market to water down prices which is believed to be supported to supply gaps in the market.

The 24 country OPEC+ had on Thursday announced 648,000 barrels per day rise in its estimated output for the months of July and August but the news failed to pull down prices which continued to rise near $120 per barrel.

The global head of commodity research at Citigroup, Ed Morse, told agency sources that artificial factors including trade sanctions on Russia were driving prices instead of forces of demand and supply. He pointed out that oil should be selling at moderate prices due to falling demand.

He noted that energy prices, especially oil, have surged following Russia’s invasion of Ukraine, contributing to global inflation and fears of a recession. He added that Brent crude oil should fall significantly as demand drops and recession fears loom.

Ed Morse stated that fair value for oil in the market is currently exaggerated.

Brent crude has surged more than 50% year to date after Russia’s invasion of Ukraine and Western sanctions on Moscow sent energy prices soaring.

On Tuesday, oil jumped to a two-month high of more than $123 a barrel after the European Union agreed to ban most Russian oil imports as part of its sixth round of sanctions.

Morse said Citi’s demand expectations for oil had dropped sharply this year as fears of a recession took hold. The Wall Street giant cut its demand expectations by 1.4 million barrels.

“We had at the beginning of the year expected there would be around 3.6 million barrels a day of demand increase year over year. We’re now down to 2.2 million barrels a day,” he said.

“That’s a big difference if you are pulling on a refining system that is under duress,” Morse added. “A world staring at a recession is not a world with robust demand growth for diesel.”

Recession concerns around the world have mounted recently. The World Bank warned that the Russia-Ukraine war has caused commodity prices to rise to such an extent that a global recession may now be inevitable.

“As we look at the global GDP … it’s hard right now to see how we avoid a recession,” World Bank President David Malpass told the US Chamber of Commerce, according to a Reuters report. “The idea of energy prices doubling is enough to trigger a recession by itself.”

Other market analysts have however pointed at key demand drivers as the reason for persistent oil price increases. They listed the emerging summer driving season in the United States, reopening of key industrial cities by Chinese government and trade sanctions that threaten Russia’s oil output.

OPEC+ had ahead of its meeting cut global oil demand forecast for the year by 200,000 barrels per day (bpd), saying global oil demand is now expected to grow by 3.4 million bpd this year, with the geopolitical situation and COVID developments cited as key risks to the forecast.

OPEC had earlier last month revised down its global oil demand growth estimate for 2022 a second month running. OPEC said in the middle of May that oil demand would grow by 310,000 fewer barrels per day than the growth anticipated in the April report.