Global crude benchmarks have remained notably strong even as market balances appear loose on paper. Citi Research attributes the persistence of elevated prices to a combination of episodic supply disruptions, weather-related production losses and an increased geopolitical premium.
Brent futures reached $70 per barrel on Thursday and spent much of the session just below that threshold, while West Texas Intermediate (WTI) also rose sharply. Both contracts moved higher amid mounting tensions between the U.S. and Iran.
Citi's assessment of the gap between fundamentals and price
According to Citi, the current market is running an oversupply of about 2 million barrels per day. In the bank's view, that level of surplus would normally point to an oil price near $50 per barrel. Citi had earlier anticipated that average prices this year would fall in the $60s.
"Kazakhstan production outages, severe cold weather in the U.S., geopolitical tensions in the Middle East and tightening U.S. restrictions on Russian oil purchase collectively added to price strength >$60/bbl,"
Those words came from Citi analysts led by Anthony Yuen in a research note issued on Wednesday.
Supply-side shocks and weather
Citi highlights a set of concrete disruptions that have tightened available barrels. The Tengiz oil field in Kazakhstan - described in the research note as the deepest producing supergiant field in the world - has been offline since earlier this month following a fire. That outage has exerted upward pressure on Brent by removing a substantial volume of Kazakh output from markets.
Meanwhile, winter storm Fern in the United States reduced domestic oil and gas activity. Citi's analysts estimate that at its peak the freeze-off cut roughly 1.5 million barrels per day of oil production, a material shortfall given the size of U.S. output.
Geopolitical premium and policy-driven supply effects
The research note also assigns part of the price elevation to geopolitics. Citi estimates that the possibility of a U.S. military action against Iran has lifted the oil price by about $3 to $4 per barrel. Additionally, measures by the U.S. administration to pressure buyers of Russian oil - for example, efforts that effectively constrain purchases by countries such as India - act to tighten available supply.
Even with these elements accounted for, Citi notes that the basket of factors alone does not fully explain why prices are trading well above the high-$40s or $50 per barrel implied by a 2 million barrel per day surplus. The analysts point to ongoing Chinese buying for inventory as a further support to prices.
Near-term market moves
As of 14:32 ET (19:33 GMT) on the same day Citi published its note, Brent futures were quoted up 3% at $69.40 per barrel. WTI futures were higher by 3.2% at $65.27 per barrel.
The combination of a measurable oversupply on paper and several episodic, price-supportive factors leaves markets with elevated price levels that, according to Citi, reflect temporary and policy-related drivers as much as structural tightness.