Oil prices should soften into year end as oversupply begins to exert impact, says Citi

Citi forecasts Brent crude prices, currently around $67.7/barrel, to maintain support in Q3 at an average of $66/barrel, driven by geopolitical tensions surrounding Russian oil and OPEC+ production shortfalls. However, the bank anticipates a softening to $63/barrel in Q4 as looming oversupply and seasonal demand shifts are expected to exert greater impact on the supply-demand balance. This outlook comes as JP Morgan also recently adjusted earnings forecasts for BP and Shell, reflecting broader, varied expectations within the energy sector.

Analysis

Citigroup's latest analysis presents a two-phased outlook for Brent crude, forecasting near-term price support followed by a decline into year-end. Currently trading at $67.7 per barrel, prices are expected to remain resilient in the third quarter, with Citi maintaining a Q3 average forecast of $66/barrel. This stability is attributed to persistent geopolitical factors, including tariffs on Russian oil and attacks on its infrastructure, which are counteracting underlying oversupply pressures. Furthermore, disappointing production from OPEC+ and stronger-than-reported Indian diversification away from Russian crude, reflected in a tighter Brent-Dubai spread, are contributing to current price resilience. However, the bank anticipates a shift in market dynamics in the fourth quarter, projecting an average price of $63/barrel as a "looming oversupply" and seasonal demand declines from the end of summer driving and Mideast cooling seasons exert greater influence. This moderately bearish outlook is echoed in a separate note from JP Morgan, which has cut its current-year earnings forecast for BP by 5% and its next-year forecasts for both BP and Shell by 4.3% and 3.5% respectively, signaling expectations of a less favorable pricing environment for major energy producers.

Key Decisions for Investors

• Given the forecast for Brent to soften from a Q3 average of $66 to a Q4 average of $63 per barrel, investors may consider taking profits on long crude positions or implementing hedges as the fourth quarter approaches.
• The downward earnings revisions for BP and Shell by JP Morgan suggest potential headwinds for energy sector equities; a portfolio review to assess exposure to these names is warranted in light of the softening oil price outlook for next year.
• Investors should closely monitor developments in the Russia-Ukraine conflict and OPEC+ production data, as these are the primary variables supporting current prices and any de-escalation or output change could accelerate the forecasted decline.