Oil Is Overvalued By $50 Per Barrel

According to Ed Morse (Citi’s global head for commodity research), Brent crude oil, which traded Wednesday at more than $116 per barrel, should have been closer to $70 according to Bloomberg.

Morse, who has been one the most bearish pundits, saw demand growth of 3.6 million barrels per day at the start of the year. Citi now estimates that oil demand is at 2.2 million barrels per day year-on-year due to economic slowdown and recession fears. This is down 1.4 million barrels from the start of 2022.

Oil prices have risen by around 50% in the last year due to Russia’s invasion and subsequent Western sanctions. Reuters poll by analysts on Tuesday showed that Brent prices averaged just over $107 per barrel in Q2. Some experts are predicting $130 per barrel in the wake of the EU’s partial ban against Russian imports.

However, Citi’s Ed Morse says it’s all a bit exaggerated.

Morse stated that it was more expensive in the $70 than in the $120 range. Look at the flow curve to determine the fair price for oil. It’s exaggerated.”

After two months of lockdowns which had slowed fuel demand, oil prices rose on Wednesday due to the reopening of China’s financial hub.

In line with Citi’s $70 oil value based on demand, the OPEC+ Joint Technical Committee decreased its global oil demand forecast for 2022 by 200,000 bpd. They now expect oil demand growth of 3.4 million bpd. This is the second consecutive month that OPEC has revised its projections for oil demand growth.

These demand projections suggest that OPEC+ will not raise its production quotas when it meets on Thursday based on these demand projections.

Reuters cited unnamed OPEC+ sources Wednesday as saying that the group was poised to abandon its modest oil production increases due to shortages of production capacity.

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