Citi Predicts Oil Prices Plunging 36 Percent in Case of Recession

Citi Predicts Oil Prices Plunging 36 Percent in Case of Recession
An aerial view shows oil tanks of Transneft oil pipeline operator at the crude oil terminal Kozmino on the shore of Nakhodka Bay near the port city of Nakhodka, Russia, on June 13, 2022. Picture taken with a drone. (Tatiana Meel/Reuters)
Naveen Athrappully

Investment bank Citigroup is predicting oil prices to tumble by the end of the year if the world slips into a recession.

Crude oil prices could end up at $65 per barrel by the end of 2022, analysts from the bank said in a July 5 note, Bloomberg reported. By 2023, prices could collapse further to $45. The prediction is contingent on a decline in oil investment and the absence of any market intervention by OPEC+.

“For oil, the historical evidence suggests that oil demand goes negative only in the worst global recessions,” the bank said. “But oil prices fall in all recessions to roughly the marginal cost.”

Brent crude was trading at around $103 per barrel as of 12:11 a.m. EDT on July 5. For Citi’s prediction to come true, oil has to fall over 36 percent from current prices in 2022 and by more than 56 percent to hit the 2023 forecast.

Meanwhile, analysts at JP Morgan are predicting oil to more than triple in price if Russia decides to cut down output. In a note, analyst Natasha Kaneva warned that oil could increase to $380 per barrel if Moscow reduces oil output by 5 million barrels per day. In case of a 3 million barrel-per-day decrease, prices could hit $190 per barrel.

“It is likely that the government could retaliate by cutting output as a way to inflict pain on the West,” the analysts wrote in what they described as a worst-case scenario. “The tightness of the global oil market is on Russia’s side.”

US Gas Prices

While the international oil supply affects U.S. gasoline prices, American consumers have to deal with another issue in the coming months that could have a major impact on fuel costs—the hurricane season.

In recent years, hurricanes are known to have temporarily knocked off processing capacity in the U.S. Gulf Coast, where 47 percent of the country’s motor fuel is produced.

To make matters worse, five oil refineries were shut down during the COVID-19 pandemic. One refinery has suffered extensive damage due to storms. Refinery utilization at present is close to 95 percent, indicating strong demand.

“We are heading into hurricane season in the tightest refining market we've ever been in on a global scale,” Rory Johnston, founder of the Commodity Context newsletter, told Reuters.

In 2017, when Hurricane Harvey flooded the Texas coast, the state’s refining capacity was temporarily shut down. Retail gasoline prices jumped 29 cents in the aftermath. In 2005 when Hurricanes Katrina and Rita disrupted refining capacity at plants in Texas, Louisiana, and Mississippi, gas prices jumped 46 cents.

According to data from the American Automobile Association (AAA), regular gasoline averaged $4.80 per gallon on July 5, up from $3.13 per gallon a year ago but slightly down from the $5.016 per gallon record high hit last month.