Citi: High Volatility in Oil Market Expected Prior to Any US-Iran Agreement

Citigroup's Global Head of Commodities Research, Max Layton, said on Thursday that international oil prices will continue to fluctuate violently until it is clear whether the US and Iran will reach a ceasefire agreement. Despite recent optimism in the market due to diplomatic efforts and expectations that the Strait of Hormuz will reopen, Max Layton believes that this news-driven volatility is difficult to eliminate in the short term.

The trend of crude oil trade this week confirmed Max Layton's judgment: Brent crude once surged to over $115 per barrel, and then fell back to below $100. He said in an interview with Bloomberg TV that the stance of Iran's new leadership makes predictions extremely difficult. In this uncertain environment, oil prices are bound to go through a "roller coaster" as news develops.

For investors, the biggest risk at present is that the supply pressure in the global physical crude oil market has not been alleviated. Since the US-Iran talks did not yield substantial results, Citigroup has raised its forecast for the Brent crude benchmark price to $110 per barrel. Even if both sides can reach a consensus, global physical supply remains extremely tight due to loading delays at key terminals such as Oman.

Max Layton pointed out that over the past year, the world has accumulated about 700 to 800 million barrels of inventory buffers, but the market is currently consuming these reserves at an astonishing rate. Only when Iran genuinely shows its sincerity to reconcile with the United States, Citigroup may lower its oil price expectations.

Data from Rystad Energy, a consulting firm, shows that since the outbreak of the conflict, the world has lost about 600 million barrels of crude oil supply. If shipping can only be resumed by the end of May, the supply gap may expand to 2 billion barrels, equivalent to a quarter of the global inventory before the conflict. Patrick Pouyanne, the CEO of TotalEnergies, also warned that global oil and gas inventory is being consumed at a rate of 13 million barrels per day.

Looking forward, the market's focus is on the repair cycle after the agreement is signed. Darren Woods, CEO of ExxonMobil, reminded investors that even if the Strait of Hormuz reopens, it will take one to two months for oil flow to return to normal. There is a significant lag in the supply chain due to shipping backlogs and the shutdown of nearly 2 million barrels per day of refining capacity in the Middle East.

Despite claims that oil prices will fall quickly after the conflict ends, the industry consensus tends to believe that high oil prices will persist for a long time. A survey by Reuters shows that analysts are collectively raising oil price expectations, predicting that the average price of Brent crude this year will remain around $86.38 per barrel. This price level is much higher than the pre-conflict benchmark of $62 per barrel.