Oil Is Overvalued By $50 Per Barrel

  • Citi’s Ed Morse reiterated his bearish view on crude oil in an interview on Bloomberg.
  • Morse: Oil should be trading at around $70 per barrel.
  • Citibank revised its demand growth outlook down by 1.4 million bpd to 2.2 million bpd y-o-y.

Brent crude, trading Wednesday at over $116 per barrel, should be closer to $70, according to Citi’s global head of commodity research, Ed Morse, in an interview with Bloomberg.

Morse, which has been one of the most bearish pundits saw demand growth at 3.6 million bpd at the beginning of the year. Citing recession fears and economic slowdown, Citi is now estimating that demand growth for oil stands at 2.2 million bpd year-on-year, down 1.4 million bpd from the beginning of 2022.

Oil prices have surged some 50% since the beginning of the year, with Russia’s invasion of Ukraine and resulting Western sanctions roiling global energy markets. On Tuesday, a Reuters poll of analysts showed a consensus for Brent prices to average just over $107 per barrel in Q2, with some experts eyeing $130 per barrel in the aftermath of the EU’s partial ban on Russian imports.

But it’s all overblown, says Citi’s Ed Morse.

“I’d say it’s more in the $70 range than it is in the $120 range,” Morse told Bloomberg. “If you look at the fair value for oil, look at the flowing curve. It’s exaggerated.”

On Wednesday, oil prices continued to rise with the reopening of China’s key financial hub, Shanghai, after two months of lockdowns that had chipped away at fuel demand.

At the same time, more in line with Citi’s $70 oil valuation based on demand, the OPEC+ Joint Technical Committee (JTC) in a Wednesday meeting reduced its global oil demand forecast for 2022 by 200,000 bpd, now expecting oil demand growth to be 3.4 million bpd. This is the second month in a row OPEC has downwardly revised its oil demand growth projections.

Based on these demand projections, when OPEC+ meets on Thursday, it is unlikely to raise its production quotas.

Unnamed OPEC+ sources cited by Reuters said Wednesday that the group was on track to leave its existing, modest oil output increases in place due to spare production capacity issues. 

Source:Citi: Oil Is Overvalued By $50 Per Barrel | OilPrice.com