Investing.com — Oil prices have fallen slightly in recent weeks, dropping nearly $75 per barrel. Citi Research, in a note on Wednesday, sees this as a potential near-term buying opportunity even as geopolitical tensions have eased. The brokerage identifies several factors that could lead to a recovery in oil prices, which could potentially reach $80 per barrel.
The recent price decline is largely due to geopolitical developments, especially in Gaza, where a potential ceasefire is in sight, reducing immediate risks. In addition, the economic slowdown in China, characterized by weakened industrial production, has contributed to a more cautious outlook for oil demand.
These factors have led to a reduction in the geopolitical risk premium for oil, further pressured by weak Chinese oil import data and subdued demand for middle distillates in the US.
However, Citi Research notes that geopolitical risks are far from eliminated. The possibility of weather-related disruptions during hurricane season, along with continued tensions in North Africa and the Middle East, could provide near-term support for oil prices.
The market’s current positioning, which is historically short, also indicates a potential for a recovery, especially if the Brent price falls to the $75 per barrel level.
In the US, recent data from the Energy Information Administration (EIA) is mixed, but somewhat bullish for crude oil. Commercial crude inventories fell 4.6 million barrels to 426 million barrels, exceeding Bloomberg’s expected decline of 1.9 million barrels, Citi added.
Refineries also rose slightly, with gross crude oil exports and imports rising, leaving net imports marginally higher.
Gasoline inventories fell by 1.6 million barrels, in line with the broader trend of stockpiling in major oil products. Distillate inventories also saw a significant decline of 3.3 million barrels, reinforcing the positive outlook for crude oil. Despite these declines, jet fuel inventories rose slightly and ethanol inventories increased, reflecting a mixed picture for refined products.
Speculative positioning in the ICE Brent complex has struggled in August, with a noticeable lack of enthusiasm on the upside. However, the ratio of Brent Managed Money (MM) gross longs to shorts has improved to 1.6x, recovering from pandemic-era lows.
Technically, Brent’s 200-day moving average of $82.5 per barrel acts as a strong resistance level, while support remains around $75 per barrel. This technical setup could further encourage buying as Brent approaches the bottom of this range.
Looking ahead, Citi Research suggests that OPEC+ could face tough decisions in the coming months. The group is expected to start easing production cuts in October, but if Brent prices continue to fall towards the low $70s per barrel, additional measures could be considered to stabilize the market.
This could include extending or deepening current production cuts. OPEC+ is likely to defend the $70 per barrel level, especially given the group’s projection of global oil demand growth of 2.1 million barrels per day (b/d), the highest forecast among major oil agencies.
“Potential refinery cuts can be expected as cracks in gas oil have tumbled over the past week, skimming margins for refiners,” the analysts said.
Refiners’ margins have been under pressure, especially as gasoil rips fell below $17 per barrel in recent sessions. This decline could lead to refinery cuts, mainly due to planned maintenance in Europe and possible disruptions to Russian exports.
Nevertheless, Citi Research expects a possible recovery of gas oil cracks as the winter season approaches, potentially returning to the $20 per barrel range.
