As the oil markets (CL1:COM), (CO1:COM) have come off from the last three months by around $15, and the market feels unsure whether OPEC+ would extend or even deliver set cuts, mature industrial economy growth could deteriorate in 2024, said Max Layton, Citi global head of commodities research.
“We think there’s a relatively small risk premium in the market for the Middle East supply risks,” Layton said during a CNBC interview. “Overall, the market is correctly priced for the first quarter.”
In addition, Layton said he is bullish on precious metals and neutral to bearish energy.
“There’s obviously a material non-zero risk that the situation in the Middle East gets worse and [causes] either outright impacts supply or drives a higher risk premium,” he said, “but I think it’s difficult to call whether or not the market pays for that in the face of what is a pretty sizable second quarter surplus, absent OPEC+ rolling forward those cuts through the second quarter.”
There is a surplus of more than a million barrels for the second quarter overhanging the market together with spare capacity. But the possibility of cuts extending over the entire year is “a really plausible scenario,” he said.
“It’s within OPEC+ graphs to balance this market next year, and to protect these kinds of prices — around $70-75 for the WTI and Brent,” he said. “If you wait, you give time for supply disruptions to occur. All the time you’re waiting you’re allowing your out-of-the-money supply disruption auction to come into the money. That would then allow them to ramp back up into that supply weakness.”