Citi believes international oil prices will average $60 a barrel in 2019, remaining near current levels as OPEC-led production cuts encourage U.S. drillers to put more crude on the market.
OPEC, Russia and other producers agreed on Friday to remove 1.2 million barrels per day from the market beginning in January. The move follows a more than 30 percent collapse in oil prices that saw international benchmark Brent crude fall from more than $86 a barrel to a 13-month low of $57.50 last month.
Some analysts forecast the production cuts will cause Brent to rebound back toward $70 or $80 a barrel.
However, Citi says an earlier round of production cuts from the so-called OPEC+ alliance has only delayed the inevitable. Rather than putting oil on a steady upward trajectory, the new supply cuts "almost certainly" set up another sell-off.
"OPEC+ did the work of drawing down inventories that otherwise would have to be done through a painful period for shale producers," Citi said in a research note written by a team led by Ed Morse, the firm's global head of commodities.
According to the bank, "the more OPEC+ tries to support prices by withholding oil from the market, the more they give the US shale sector an out from rationing supply growth themselves."
Citi says U.S. crude prices would need to hold steady around $45 a barrel in order keep American production flat. U.S. output has recently risen to an estimated 11.7 million barrels per day, making the United States the world's biggest crude oil producer.
In its primary forecast, Citi sees Brent crude trading at $55 to $65 a barrel in 2019, as global oil stockpiles continue to rise through the middle of the year.
If the OPEC+ production cuts fall apart, Brent could fall back into the $40s, Citi says. On the other hand, if OPEC and its partners decide to take more oil off the market, or if supply disruptions develop, Brent could rise back to $70 or $80.
The bank also believes the oil market is heading for another streak of volatile trading, in part due to competing priorities by the world's top three producers.
President Donald Trump wants U.S. crude prices to keep falling from the low $50s, while Saudi Arabia prefers Brent crude at $70 to $80 a barrel. Meanwhile, Russia is setting its budget assuming $40, and Moscow is content with $60 oil, Citi notes.
"While two Presidents and a Crown Prince are behind policy drivers of oil prices in the near term, they can't push market prices far from equilibrium price levels for too long," Citi wrote. "Citi believes this is in a $45-60 range in the medium term."
Citi currently sees demand for oil growing at 1.31 million bpd in 2019. However, the bank warns that the world's appetite for oil might only grow by a little more than 1 million bpd if the United States and China escalate their ongoing trade dispute. A trade deal could lead to 1.56 million bpd in growth.