It’s like the sun exploding: One Wall Street firm fears $200 oil — and says it’s not too late for investors to prepare

The supply disruptions, according to one client at Citi, are akin to the sun exploding. - Getty Images/iStockphoto

The fighting continues in the Middle East, and oil’s back on the move, as the clock ticks on President Donald Trump’s five-day deadline for resolving differences with Iran.

That’s the backdrop for Wall Street giant Citi’s 165-page opus on the global commodities outlook, written by strategists led by Maximilian Layton.

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“We posit that the ongoing loss of energy supply to [the] global economy is so large (larger than the shocks of the 1970s as a share of oil supply) that it simply must be solved, either militarily or diplomatically, and that through various potential channels this occurs by mid-late April,” they said.- Citi

That said, they expect things to get worse from here — Brent BRN00 rising to at least $120 per barrel over the coming month. And in a scenario where there’s a prolonged disruption through the end of June, oil prices could sky to some $200 per barrel “all-in,” meaning crude oil plus consumption-weighted oil-product premiums. They come up with that number based on the typical relationship between inventory and price, given the world is now without 13.5 million barrels per day, taking out some 400 million barrels per month, due to Strait of Hormuz disruptions.- Citi

The firm answers the question of why risky assets have held their own — the S&P 500 SPX is only about 5% from its January highs — despite crude-oil and product expenditures soaring to a $4.6 trillion annualized rate, from $2.6 trillion in January.

“We note (eerily) that it took major risk-exposed assets more than a month to figure out COVID was bad, and it took it even longer for them to figure out Russia/Ukraine was bad,” the strategists said. They said one client mused that the supply shock is like the sun exploding — there’s still calm for the eight minutes it takes for the light to reach Earth.

They do give a 20% probability to a quick Iran-U.S. deal where the Strait of Hormuz reopens; that would send crude prices down to between $65 and $70 by year-end.

They say it’s not too late to hedge upside risks to global inflation with commodities, noting that the Bloomberg Commodity Index is only up about 10% since the conflict began.

Their other big talking point was gold, arguing the question is not if but when to buy the yellow metal. “One might have thought that the potential for the largest inflation shock in 50 years might have seen gold increase,” they said.

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The time to buy gold GC00, they argue, is path- rather than price-dependent. Should the conflict end over the next four to six weeks, then the time to buy would be when equities bottom. Should the conflict last longer, the buy signal could be when inflation-adjusted interest rates start falling or when gold prices put in a technical turn in their momentum.

The markets

U.S. stocks SPX opened lower as oil futures CL00 were climbing. The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 6 basis points to 4.41%.

Key asset performance Last 5d 1m YTD 1y S&P 500 6581 -1.77% -3.75% -3.86% 14.10% Nasdaq Composite 21,946.76 -1.91% -3.01% -5.57% 20.66% 10-year Treasury 4.373 17.00 33.50 20.10 5.20 Gold 4415.6 -11.89% -14.44% 1.93% 45.91% Oil 90.88 -5.35% 37.53% 58.30% 31.33% Data: MarketWatch. Treasury yields change expressed in basis points

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The Wall Street Journal reported that U.S. allies in the Persian Gulf are moving closer to joining the fight in Iran.

The economics calendar includes the flash release of purchasing managers indexes for March, an indicator of how companies are reacting to war in the Middle East.

A $69 billion auction of 2-year notes BX:TMUBMUSD02Y is ahead.

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Concentrix Corp. shares CNXC fell as the outsourcing company’s earnings lagged expectations.

GameStop GME and KB Home KBH report results after the close.

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