Citi lifts its bull case oil price forecasts on Middle East tensions

Citigroup has lifted its bull case for oil prices after assessing historical risk events, given the potential for supply disruption in the Middle East. 

The US bank keeps its baseline forecast for $74/bbl Brent in the fourth quarter of this year and $65/bbl during the first quarter of 2025, with an indicative probability of 60%, owing to weak underlying oil market fundamentals.

However, Citi has lifted its bull case scenario for oil prices for the 4Q’24 and 1Q’25 to $120/bbl from $80/bbl, lifting its indicative probability to 20%, up from 10%, given the heightened potential of the market to fear or realize supply losses during the months ahead.

A recent analog to the potential escalation in the Middle East from here is the Russia-Ukraine conflict in Feb’22, during the beginning of which Brent oil rallied to average $116/bbl in 2Q ’22, the bank said. 

“Our new bull case scenario is based on supply fears and disruptions similar in magnitude and duration to that which occurred during 2022,” analysts at Citi said, in a note dated Oct. 14. 

Losses that may arise from escalation could range from an attack on a refinery disrupting crude oil and liquids supply (around 0.1-0.7 million barrels per day), to losing most of Iran’s crude oil exports (around 1.5m b/d), all the way up to impacting different degrees of impacts on the oil flows through the Strait of Hormuz (up to 20m b/d), “although we view the latter as highly unlikely.”

Supply losses might also come from any response by Iran that targets regional energy assets. 

“In our bull case scenario, we model higher actual disruptions than was the case during Russia-Ukraine, however higher levels of spare capacity and stock levels, and a weakening demand environment, may mean a similar price response,” Citi added. 

The bank’s bear scenario includes OPEC+ raising production, starting in December, and a reduction in oil supply risks sees prices at $60/bbl for the 4Q’24 at $60/bbl and $55/bbl in 1Q/25, with an indicative probability of 20%, down from 30%.

At 05:50 ET (09:50 GMT), Brent traded 4.9% lower to $73.66 a barrel.

 

 

Source: Investing.com