Citigroup has indicated that Brent crude oil could extend its decline to $60 per barrel by the end of the year as disruptions in the Strait of Hormuz ease. This expands the cohort of institutions holding bearish forecasts for the global crude market.
Analysts at Citigroup, including Francisco Martoccia, noted in a report: "Fundamentals are rapidly reasserting dominance in the market. Shipping flows are normalizing, Chinese buyers remain absent, the physical crude market has weakened sharply, and inventory draws are far below expectations."
As traffic through the Strait of Hormuz recovers, boosting near-term supply, the global energy market is swiftly returning to normalcy. This provides additional crude supply to processors (refineries) who had previously secured alternative sources. The result has been a rapid price collapse, with the global benchmark Brent crude falling 30% in the second quarter, erasing all gains made during the conflict period.
The analysts stated that the initial phase "is expected to be volatile as shipping routes normalize, insurance markets adjust, and residual logistical bottlenecks work their way through the system. However, the return of organized shipping patterns and increasing traffic volumes indicate commercial operators are increasingly viewing the risk environment as manageable rather than prohibitive."
Among other banks, Goldman Sachs Group stated that the global oil market will shift back towards oversupply as the effects of the Iran war fade and traffic through the Strait of Hormuz recovers. Morgan Stanley has lowered its oil forecasts twice in recent weeks and warned of oversupply risks.
Brent crude traded slightly above $72 per barrel on Friday, having last traded below $60 in January of this year.
Citigroup analysts said: "We continue to recommend selling into any summer rally and forecast Brent crude to reach $60 to $65 per barrel by the end of this year."
The Strait of Hormuz, which connects Persian Gulf producers to global markets, experienced a dual blockade during the US-Iran war that erupted in late February, throwing energy markets into disarray. Tehran and Washington have signed a memorandum of understanding (MOU) to suspend hostilities and are currently seeking a permanent agreement.
Citigroup, referring to the Middle East, stated: "We expect this MOU will hold and translate into a formal agreement in the coming months, as the positive momentum for de-escalation outweighs alternative paths for the US, Iran, and much of the Middle East."
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