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Citi's commodities research team has tempered its outlook for oil prices over the next five years, but it sees room for price shocks if oil supply disruptions increase dramatically or fall off significantly in the coming years.
The bank had projected in February that U.S. crude prices would likely trade mostly in a range of $40 to $65 from 2017 to 2022. It now sees prices trading at $40 to $55 a barrel in the 2018 to 2020 period and then $50 to $60 through 2022.
To be sure, the $60 cap through 2022 implies "smooth sailing" for oil markets during that time period, but Citi sees room for significant price volatility.
Citi notes that the oil market has experienced a high level of disruptions to crude supply in recent years. Prices could spike above $70 a barrel if recently restored production in places such as Nigeria and Libya falls again. But it could also sink below $40 if disruptions elsewhere in the world get resolved, putting more crude oil into the market.
The bank challenges the warnings from the International Energy Agency and major producing nations that declining production rates in oil reservoirs and a lack of new projects will leave the oil market undersupplied. U.S. shale may not be able to meet the outstanding demand, leaving the market vulnerable to price spikes, according to concerned observers.
But Citi thinks robust U.S. shale productivity and an improved outlook for projects in nations such as Mexico, Guyana, Brazil and Canada can keep the market balanced and prices capped around $60 through 2022.
"This is contrary to the conventional wisdom forming and espoused by the likes of the IEA to the Saudis and the Russians among others, who warn that a supply gap is emerging imminently, perhaps by the end of the decade," Citi analysts wrote.
Citi believes that U.S. shale oil has fundamentally altered the oil market, and investors now need to think about shale drillers' ability to pump more or less to balance the market. The bank believes there is room for about 1.5 million barrels a day of growth through 2020 from U.S. shale fields, where drillers use advanced methods to free oil and gas from rock formations.
In its base case, U.S. crude prices would average around $55 a barrel through 2022.
Citi's outlook for U.S. crude could rise by $5 a barrel if costs in the U.S. oil patch increase by more than expected. But it could also fall by $5 if productivity is better than anticipated. Inflation and productivity could also offset each other, keeping the average five-year price right around the $55-a-barrel mark.
An unexpected drop of 1 million barrels a day of global production from current levels in 2018 could cause prices to jump to the $60 to $70 range.
"These supply losses could come from a return to higher levels of disrupted supply in Libya or Nigeria, falling back after the recent recovery. It could also come from new disruptions in Venezuela," Citi said.
If supply disruptions lessen by 500,000 barrels a day next year, prices could drop into the $30s, Citi said.
However, U.S. shale oil drillers can balance out supply shocks by pumping more or less, which can bring prices back down to Citi's anticipated range within about a year.