Despite the broader context of "oversupply," crude oil has exhibited a stronger market trend. Citibank Research suggests that, based on a static supply-demand analysis, the current daily surplus of approximately 2 million barrels should have suppressed oil prices to a lower range. However, a series of short-term shocks have cumulatively led to a higher risk pricing in the market, with Brent reaching around $70 per barrel, and WTI following suit.
Why the Supply-Demand "Arithmetic" Fails: Surplus Doesn't Mean Immediate Cheap Prices
The core logic from Citibank is that the "surplus" described in supply-demand balance sheets is an average on an annual or quarterly level, but prices are often determined by the flexibility of front-end supply, geopolitical tail risks, and the tightness of spot supply. This means that even if the year is generally in surplus, as long as there is continuous disruption in the spot market, oil prices may remain at a higher level for an extended period.
Three Drivers on the Supply Side: Tengiz Shutdown, Cold Wave Production Cuts, Russian Oil Constraints
The first driver comes from Kazakhstan. The Tengiz oil field, shut down due to fires and other incidents, has heightened expectations of tightened supply in the Brent system. The uncertainty regarding the duration of the shutdown also amplifies the market's sensitivity to short-term gaps.
The second driver stems from extreme weather in the United States. Winter storm Fern has impacted oil and gas production and logistics, causing output to significantly decrease at its peak; even as it gradually recovers, consultancies estimate that U.S. crude oil production remained at lower levels by late January compared to pre-storm levels, weakening short-term supply flexibility.
The third driver is the marginal impact of trade and sanction frictions. Citibank mentions that U.S. pressure on some countries purchasing Russian oil effectively makes some supplies more "difficult to flow" in terms of trading and transportation, reinforcing the sense of tightness in the spot market.
Geopolitical Premium Returns: Iranian Risk Adds "Insurance" to Prices
Citibank also emphasizes that the market is paying for potential U.S.-Iran conflict scenarios: this alone could add approximately $3-4 per barrel through geopolitical premium. The recent rise of oil prices to high levels aligns with concerns that "if tensions escalate, it will disrupt supply."
Hidden Variable on the Demand Side: China's Restocking Buys Provide Support
On the question of "why oil prices haven't returned to the $40-50 range," Citibank offers a more structural explanation: China's continuous procurement for inventory purposes has buttressed the demand side against declines. For traders, such "restocking demand" might not lead to immediate consumption growth but will influence prices by absorbing spot supply and tightening tradable inventory.
What the Market Will Watch Next: Three Lines Determine Whether the Strength Can Continue
- Recovery pace of Tengiz production and speed of North American weather normalizing;
- Whether U.S.-Iran tensions continue to escalate, and whether geopolitical premiums will further expand;
- Inventory and spot structure (including the strength of China's restocking) and whether they can continue to offset the "annual surplus" pressure.
In Citibank's framework, the key to oil prices is not "whether there is a surplus," but whether short-term disruptions are sufficient and prolonged enough to maintain risk premium and spot tightness at a higher equilibrium.
