OPEC Deal Creates Chance for $70 Oil Next Year, Citigroup Says

LAGOS (Capital Markets in Africa) – OPEC’s agreement to reduce oil production may help send prices above $70 a barrel next year, according to Citigroup Inc.

Output cuts agreed by the Organization of Petroleum Exporting Countries and other producers may reduce swollen inventories as early as the first quarter, reducing the surplus by about one-third, the bank predicts. OPEC finalized a deal with 11 fellow producers, including Russia and Kazakhstan, on Dec. 10 to curb output by about 1.8 million barrels a day.

“It has the intended impact of accelerating a re-balancing that was under way anyway,” Ed Morse, head of commodity research at Citigroup, said by phone from New York. “It makes me more confident in thinking that end-of-year 2017 prices will be Brent in the mid-$60 range and I would not exclude Brent exceeding $70 at times.”

While OPEC and its partners are unlikely to implement the full agreed reduction, with Gulf-based members and Russia — who will undertake the bulk of the curbs — together cutting less than 1 million barrels a day, global markets are already tightening, Morse said. Oil stockpiles are shrinking faster than major forecasting institutions estimate because supplies are being diverted to emergency reserves in China or India, or to feed new refineries and pipelines, he said.

The re-balancing of the market may still be derailed if Libya and Nigeria restore disrupted output more quickly than expected, if U.S. shale drillers can increase output faster than assumed, or if Saudi Arabia and Kuwait resume suspended operations in the shared Neutral Zone along their border, Morse said.