Analysts at Citi acknowledged the strong crude-oil rally over the past couple of weeks that has taken Brent to the $86/bbl level and shifted the structure from contango back to fairly steep 90cts backwardation, but analysts at the bank recommend clients not chase this rally as the price appears to be "too rich."
The bank noted that the rally has been on a long-awaited decline of high-frequency stocks, with a 1.8 million-bbl draw of crude oil and refined products through last week.
However, that is considered a modest decline, according to Citi, adding that the hoarding of vessels by trading firms has added to the rally and strengthening dated Brent.
Citi also points out that even if the overhang of cargos in the Atlantic Basin clears, there is still roughly 25 million bbl of unsold Nigerian crude oil. The bank does acknowledge that July 2024 Nigerian cargo trading is stronger than June 2024, but the pace of trading is only slightly above a three-year average.
According to the note to clients, Citi still sees an average third-quarter oil deficit of 200,000 b/d, but notes uncertainty around China as refinery runs there have been revised lower.
"What is also striking is that the key catalysts for healthy summer oil markets, namely a strong pull from east of Suez and a hot gasoline market, appear rather muted so far, perhaps underscoring the fragile nature of the current bullish sentiment," the bank's latest report said.
Citi does point out that renewed tensions between Russia and Ukraine, as well as rising tensions in the Middle East, do provide upside for prices and, as a result, there may need to be a loosening of tight supply and demand balances before downside pressure on oil prices emerges.
Aiding the rally has been money managers adding length in the crude complex this month. The bank expects more length to be added into the peak demand season in the upcoming quarter, but notes that the skew of long to short positioning in Brent is at 2.4 times, well below the two-year and five-year mean.
What is also causing the bank to heed cautions is that commercial crude-oil and refined product inventories on land in key trading hubs increased by 5 million bbl. The amount of oil on water though fell by a strong 32 million bbl to 1151.8 million bbl.
Overall, high-frequency data puts month-to-date crude oil and refined product draws at 2 million bbl and that draw is below the 2018-22 average of 12 million bbl of draws and 2023's draw of roughly 6 million bbl.
This content was created by Oil Price Information Service, which is operated by Dow Jones & Co. OPIS is run independently from Dow Jones Newswires and The Wall Street Journal.
-- Reporting by Denton Cinquegrana, dcinquegrana@opisnet.com; Editing by Steve Cronin, scronin@opisnet.com
(END) Dow Jones Newswires
06-27-24 1410ET
