The commodities markets are rebalancing and the worst is over for the oil market, as a slowdown in production is setting prices up for a steeper rebound than predicted at the beginning of the year, Citigroup analysts said.
“Saudi and Russia are expected to spearhead the rebalancing efforts in the oil markets. With strong recovery in oil prices experienced in the past few moths we expect further recovery in 2017,” said Ed Morse, Global Head of Commodities at Citi.
Citi analysts see fundamentals in the oil sector are tightening much faster than it forecast earlier this year. The shift is being driven particularly by a slide in production from countries outside the Organization of the Petroleum Exporting Countries (Opec) while further efforts from some of the key Opec members will drive the production cuts next year.
“Commodities markets have turned the corner led by oil market. While oil prices have accelerated the lows of the last year, other commodities such as gold are yielding big to investors,” said Petra Lottig, Head of EMEA (Europe Middle East and Africa) Commodity Investor sales.
Big institutional investors including sovereign wealth funds and family offices are taking big exposures in commodities, Citi officials said. “Clearly investors are coming back to commodities. They see the great potential of commodities in diversifying investment portfolios while offering decent yields,” Lotting said.
After a bumpy 2015, with a persistent crude oil supply excess of some 1.5-million barrels a day, supply-versus-demand dynamics are at work with a significant decline in global inventories. A slowdown in production outside Opec members, as well as severe supply disruptions in Nigeria, Libya and Canada have been key factors in helping prices rebound.
From an investment perspective, analyst said commodities, especially oil, are offering absolute return and investors and are becoming quite competitive in portfolios.
Brent and crude prices slumped 35 per cent and 30 per cent, respectively, in 2015, and dipped to 12-year lows in February this year. Since then, both have staged remarkable comebacks.
“The market is rebalancing with or without an Opec deal. In the course of 2017 further inventory drawdown is expected to accelerate and we expect this to strengthen the market further,” Morse said.
Analysts said the market dynamics have significantly changed during the past year with market share no longer a key concern for major oil producers. But increasingly the discussions are around how to boost margins.