Buy oil now, and count on Saudi Arabia for support, according to Citigroup Inc.

OPEC’s output cuts aimed at easing a global glut are “real” and is cleaning up the market, analysts including Seth Kleinman wrote in a report dated March 14. While prices have dropped recently amid rising U.S. inventories and drilling activity, investors should take advantage of the slide because the Saudis are likely to defend prices this year, according to the bank.

While Saudi Arabia told OPEC it dialed back on some of its cuts last month, the extra supplies were moved into storage and the kingdom said it remains determined to stabilize the market.

“Citi views this sell-off as a buying opportunity for 2017,” the analysts wrote. “Running down the record level of inventories was always going to be a lumpy process, with tighter timespreads pushing oil out of tank and onto the physical market where it will weigh until it clears.”

The Saudis must play a balancing act this year, needing to keep the oil price up through 2017.

The oil markets are always noisy, but it looks like the Saudis are sending a clear signal that the kingdom will defend prices over market share for the remainder of this year

In the weeks after OPEC’s Nov. 30 agreement, shorter-term oil prices began to strengthen versus longer-term contracts amid expectations the group’s output cuts would cause a shortfall this year. That trend is reversing on growing concern the curbs aren’t enough to clear the surplus in world oil inventories.

contango

In January, front-month Brent crude futures narrowed their discount — known as contango — against contracts for the following year on expectations the supply curbs would succeed. By Feb. 21, the front-month had developed a premium over the year-ahead contract, a situation known as backwardation

A move to backwardation was among the criteria Al-Falih listed for deciding whether the measures are working. Whereas contango rewards traders for amassing inventories that will be worth more in future, backwardation would encourage them to deplete those stocks and clear the surplus

Another key indicator that showed OPEC was making progress — the price difference between the Middle East’s Dubai crude benchmark and Europe’s Brent — has also faltered. It was last at $1.56 a barrel, having narrowed to $1.20 in late February, according to data from brokers PVM Oil Associates Ltd.

Saudi Arabia has ended up with precisely what it wanted to avoid. Its output cut has left it supporting rival producers, while its sacrifice of volume has yielded little in the way of higher prices. Crude fell back on Thursday to levels not seen since before the producer group announced its historic oil output cuts on Nov. 30.

Saudi oil minister Kahlid Al-Falih said last week that global oil stockpiles have been slower to decline than OPEC had hoped. In fact, they don’t seem to be declining at all.

Total U.S. inventories of crude and refined products remain more than 20 percent above a five-year average level that includes the last two years of rising stockpiles. Comparing it with 2010-2014, the surplus is more than 30 percent higher than average.

The effectiveness of the agreed output cuts has been undermined by the failure of some to reduce output as they pledged and by rising production from Libya and Nigeria, who were excluded from the deal. But the biggest impact has come from the surge in U.S. production that was beginning even as the cuts were being discussed.

So what does Saudi Arabia do now? Al-Falih’s position on extending the cuts has shifted. Six weeks ago he said an extension was unnecessary; last week, speaking at IHS Markit’s CERAWeek conference in Houston, he opened the door to the possibility of a rollover.

However, he also warned that fellow OPEC members couldn’t count on the kingdom to continue shouldering a disproportionate share of the burden. “We’ve been willing to do it for the front end but we expect our friends and partners to pick up the slack as we move forward,” he said.

The warning should be taken seriously. One thing that has remained consistent throughout Saudi Arabia’s policy shifts since Nov. 2014 is its insistence that the burden of balancing the market must be shared. That view was aired again last week.

The kingdom won’t walk away from last year’s deal, but it is preparing the ground to take a tougher line when discussions turn to what to do next. If there is no sign of more widespread compliance with agreed cuts, or that those cuts are starting to have the desired effect, Saudi Arabia’s return to active market management could prove shorter lived than its experiment with a free market in oil.

Kuwait wants OPEC to extend output cuts beyond June, becoming the producer group’s first member to call for more time to balance the global oil market as the rally that boosted prices initially on the curbs has faded.

The correction is a consequence of the disconnect between the fundamentals that continuously deteriorated throughout January and February and the lack of a corresponding price reaction.

sentiment

Fundamental indicators were the primary source of our concern. If our interpretation that the correction was triggered by the market’s recognition of fundamental challenges related to oversupply is correct, the “bounce” to the mid-$50 per barrel level (prompt WTI) would require a convincing trend change in fundamental indicators. Such a trend change – assuming, hypothetically, it is already in the making – can take several weeks to become apparent to the market.

In the latest blow, Saudi Arabia announced Tuesday that it raised output back above 10 million barrels a day in February — reversing about a third of the cuts made the previous month — sending crude to the lowest level since late November.

It could get worse. Strategists at Commerzbank AG suggest the rebound in U.S. production may send oil prices tumbling to $40 this summer.

A sustained fall below $50 will likely prove a catalyst for a meaningful re-pricing of energy credit

With $50 close to the rate at which a slew of producers break even, a prolonged bout of prices below that threshold could send energy spreads wider

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Oil’s increasing price volatility may matter for equity markets. It’s yet another indication that U.S. stock price volatility is “too low

Either stocks have to become more volatile or oil prices need to calm down

There’s some solace for investors: Oil and stock-price correlations have fallen in recent years, potentially presaging a return to a pre-crisis norm of benign indifference

This means that the days of oil prices driving equity prices are likely coming to a close unless some geopolitical shock recouples them through the linkage of higher gasoline prices and their effect on the U.S. consumer