Crude oil prices could shoot up to $70 a barrel by the end of 2017 as supply and demand levels continue to rebalance in coming months, according to analysts at Citi.
Nearer-term, the research team has raised price estimates modestly by $5 to an average $55 per barrel for the first quarter and by $2 to an average $56 per barrel for the second quarter.
Yet investors will likely have to wait a few more months for a more sustained rise, says Citi in the note published Tuesday, as Brent traded up marginally to around $56 in early European trade.
“Oil prices are not likely to stray far from their current $53-58 per barrel range in the near term as record investor net length and bearish inventory data will likely cap prices until more tangible evidence of a tighter market emerges,” write the analysts.
Citi’s research team is looking to the second quarter for positive effects from both the reported 93 percent compliance level of OPEC participants in last November’s production cut agreement as well as substantial refinery maintenance in Asia scheduled for the spring.
However, a close eye must be kept on delivery timetables, David Ernsberger, Global Head of Energy at S&P Global Platts, told CNBC’s Squawk Box on Tuesday.
“There is the shadow looming of new supply coming to market not just from Iran but also from the U.S. and what we’re looking at heading into the second quarter is when will that oil come to market and will it begin to take the edge off prices a little bit,” he noted.
Looking beyond 2017, Citi’s optimism also fades on expectations that increasing numbers of shale producers will be enticed back into the market by more favorable pricing.
However, the impact of shale is hard to accurately predict given the lack of uniformity in the product says S&P Global Platt’s Ernsberger.
“One cargo of shale oil is not like another and you don’t really know what is going to happen when you put it through your refinery until it lands at your port and that’s a little more uncertainty that even the oil refinery industry – which is used to uncertainty – is really willing to embrace right now,” Ernsberger explained.
“So there’s a stability of new supply issue that really needs to get worked out in the next few years,” he added, saying this was the “big story” regarding shale right now.
Another prominent concern in the market is the distribution of derivative positioning with record net long positions and a current long to short positioning ratio of around 10:1, with this being a key reason why oil will soon drop to below $50 per barrel, Eugen Weinberg, Head of Commodity Research at Commerzbank, told CNBC’s Street Signs on Tuesday.
Weinberg also argued that the focus on OPEC compliance levels were like a distracting “magician’s show” while the real action is taking place in the U.S., which he claims is on the way to regaining its crown as the world’s largest oil producer.
“OPEC must at some point recognize and understand that they are no more the marginal producers and marginal production will be coming from shale oil so prices will come under massive pressure during this year once investors recognize oil supplies are not going to disappear,” he opined.
“The world is awash with oil at the moment and there continues to be endless supply so therefore I don’t see a real reason for prices to rise above $60 or $70…so I’m really seeing probably the risks of the prices falling below $50 for a considerable period of time and probably even touching the levels of $40 to $45 this year,” he concluded.