Oil is a buy for Citigroup as Goldman says market getting tight

Grant Smith, Alex Longley and Jonathan Ferro May 05, 2017

LONDON (Bloomberg) -- Oil’s slump to a five-month low is driven purely by technical trading and supply is still getting tighter, according to Citigroup Inc. and Goldman Sachs Group Inc.

“The market is really fundamentally tightening up,” Citigroup’s Head of Commodities Research Ed Morse said in a Bloomberg television interview on Friday. “It’s never possible to call a bottom, but I suspect this is a great buying opportunity” before a big jump in prices by the end of the year, he said.

Fuel stockpiles continued to decline in April and the trend will accelerate as OPEC extends its production cuts beyond June, Goldman Sachs said in a note. “The broader oil demand picture so far this year remains supportive,” the bank said.

The price of West Texas Intermediate, the U.S. benchmark, has collapsed 8% this week, erasing almost all gains since the Organization of Petroleum Exporting Countries signed a six-month deal in November to curb production. While the two banks acknowledged bearish factors -- notably expanding U.S. output -- they attributed the recent capitulation to volatile trading patterns.

“It’s all technicals,” said Morse. “There’s nothing fundamental, nothing has changed in the market.”

The current price plunge started when West Texas Intermediate crude broke through its 200-day moving average last week. Once that gave way, another key technical indicator called a Fibonacci retracement was breached, paving the way to the low of the year and then $45/bbl.

“Technicals and positioning likely accelerated the move lower,” said Goldman Sachs.