CITI: The 30% spike in oil prices looks driven by something other than reality

Citi's Ed Morse doesn't think the latest rally in oil prices will last.

In a note to clients on Monday, Morse wrote that the nearly 30% spike higher in crude prices over the last 3 days, "looks driven more by sentiment than by reality."

Morse adds, "In Citi's view, it's time to 'sell the news and buy the facts.' This is reinforced by today's strong intra-day gains around 8%, which appear driven by a misread of market data and financial headlines. Notably, nearby timespreads are lagging the move higher in flat price, which is consistent with weak fundamentals."

Morse was particularly critical of the market's read on the latest bulletin from OPEC released Monday, which said that the 12-member oil cartel, "stands ready to talk to all other producers."

Markets and news organizations took this as a signal that OPEC had in some way "blinked," or admitted that it needed to - and was prepared to - lower production in the face of oversupplied markets.

"In our judgment, this was a gross misrepresentation of the Bulletin's editorial which was wistful about such a dialogue," Morse wrote. "Almost all OPEC officials are still on holiday and the lack of further reporting suggests none actually were involved in suggesting there was a change in policy."

Morse also noted that internally, OPEC has a problem with regard to who would actually take the fall and cut production. The Saudis could conceivably cut this fall, but Morse thinks this would be a function of internal consumption declining rather than a major strategic shift.

And as far as Morse sees it, shale production from the US has proven resilient to the decline in prices and said that any rebound would likely benefit these producers first.

As for when OPEC could see these swing producers leave the market, "low prices might need to be in place for perhaps a few years."

On Tuesday, oil prices were more than 4% in morning trade.