U.S. commodity futures have risen more than their overseas counterparts this year and the market is now pricing in better odds that the U.S. will impose tariffs on imports, Citigroup said in a Tuesday report.
Indeed, the investment bank said it believes U.S.-based commodities should be the preferred contracts to hedge tariff risks.
Brent crude's recent rise to $81/bbl was tied to tougher U.S. sanctions against Russia and concerns over the potential impact frigid U.S. temperatures could have on domestic production, a worry that should ease by March.
But Citi said end-2025 Brent numbers have appreciated by about half as much as dated prices in the last month, highlighting the reluctance to price a persistent deficit with high prices beyond the near-term.
The bank continues to believe oil markets will be oversupplied later this year, citing high levels of spare capacity as well as the potential for an easing of geopolitical risks.
The bank's analysts said President-elect Trump mentioned energy prices 11 times in a Jan. 9 address, noting that cheaper energy was a key factor in lowering inflation.
Citi believes Trump will have at his disposal "multiple potential paths to lowering prices" over the next six months to two years.
But in a preview of what energy might look like under a blanket 25% tariff on Canadian imports, the banks said Western Canadian Select crude's discount to West Texas Intermediate could widen by as much as $15/bbl, to nearly $30/bbl.
As recently as the winter of 2018, WCS traded at a $30-$31/bbl discount to WTI, but the price relationship then was caused by downtime at Chicago-area refineries that use the heavy sour crude blends.
Citi said it believes Canada has the ability to divert about 400,000 b/d of its crude output to other international markets and the country also could opt to shut in production to leverage its position. That action, however, would have bullish consequences for global crude and might dramatically impact end users and world economies, the bank added.
Under that scenario, Midcontinent refiners would have to scramble to find heavy sour crude from other sources, possibly boosting domestic crude prices on the margin in addition to creating a larger discount for the Canadian blends. The bank projects a potential $27/bbl discount for up-front barrels, but sees discounts by the end of the year at a more modest $15.50/bbl. WCS recently has been trading at about $13.50/bbl below the price of WTI at Hardisty, Alberta.
The bank also offered a scenario in which perhaps 500,000 b/d of Canadian crude production is shut in and said its "fair value model" would see oil prices rise by more than $10/bbl given the uncertainty over Russian supply.
Citi, however, said such a move could be perceived as brinkmanship that could inspire a "lose-lose game," as U.S. refineries resort to drawing more crude from commercial stocks and even perhaps from the Strategic Petroleum Reserve.
The bank also examined a scenario in which a blanket 10% tariff is imposed on all countries, saying such a step could be met by retaliatory actions and reduce U.S. GDP by 0.6%, dulling global oil demand growth, particularly for diesel.
The first Trump term saw the imposition of tariffs on Chinese goods and global trade growth turned negative between late 2018 to 2019, the report said. Diesel demand growth fell by nearly 350,000 b/d over that period.
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 Tom Kloza, tkloza@opisnet.com; Editing by Jeff Barber, jbarber@opisnet.com
(END) Dow Jones Newswires
01-14-25 1701ET