Global oil market likely to be ‘extremely tight’, says Citadel

Oil markets are set to become “extremely tight” in the second half of this year, according to hedge fund giant Citadel, as Opec+’s control of the market allows it to keep prices high.

Sebastian Barrack, the firm’s head of commodities, told the FT’s Commodities Summit in Lausanne on Monday that the cartel has “definitely regained control” of the oil market.

That means that the volumes that its member nations supply, and the timing of that supply, “will define where prices go in the next 12 months”, he said. Citadel was last year named the most successful hedge fund of all time and has made large profits trading commodities.

Barrack’s comments come after Brent crude, the international benchmark, climbed above $90 per barrel last week for the first time since October, driven by fears of a widening conflict in the Middle East.

Despite falling more than 1 per cent on Monday after Israel said it had withdrawn its troops from Khan Younis in southern Gaza, easing fears that the conflict would escalate, Brent is up about 16 per cent this year, while the US benchmark West Texas Intermediate has gained roughly 20 per cent.

Opec+’s position has been strengthened by what Barrack called the “level of discipline” shown by US producers, which have opted against trying to take advantage of high prices by boosting production.

If Opec+ decides not to release supplies, “we will see a level of tightness in the market that will be very constraining to the market, and high prices will have to go and help destroy demand to solve that problem”, he added.

Opec+ has undertaken voluntary production cuts since November 2022 — despite vehement US opposition — in order to boost global oil prices amid tepid global demand.

The cuts have crimped production of crude by some 5.3mn barrels a day, or about 5 per cent of global supply. The move has been led by Saudi Arabia, which requires a high oil price in order to help pay for its big spending programmes, for instance on new cities or football.

But in making the cuts, the cartel has ceded market share to non-member producers, notably the US and Canada.

Some analysts have noted Opec+ countries will ease their production restrictions if prices rise above $100 a barrel, in order to avoid further erosion of their market share.

Barrack also warned that, depending on what the cartel does, the oil market could experience “extraordinary” volatility.

In one scenario, Opec+ could decide not to do anything and tighten the market further, leading to even higher prices. On the other hand, if Opec+ misjudges the timing and the magnitude of supply releases, “we can have prices $30 lower from where we are here”, he said.