Citi says oil should be around $70 as demand drops and recession looms

• Citi's global head of commodity research said oil is overvalued at around $120 a barrel and should be near $70.
• In a Bloomberg interview, Ed Morse said Citi's demand estimate for oil is now 2.2 million barrels a day, a 1.4-million-barrel decrease from the year's start.

Brent crude oil is overvalued and should fall significantly as demand drops and recession fears loom, according to Citi's global head of commodity research.

"I'd say it's more in the $70 range than it is in the $120 range," Ed Morse said in an interview with Bloomberg on Tuesday. "If you look at the fair value for oil, look at the flowing curve. It's exaggerated."

Brent crude has surged more than 50% year to date after Russia's invasion of Ukraine and Western sanctions on Moscow sent energy prices soaring.

On Tuesday, oil jumped to a two-month high of more than $123 a barrel after the European Union agreed to ban most Russian oil imports as part of its sixth round of sanctions.

Morse said Citi's demand expectations for oil had dropped sharply this year as fears of a recession took hold. The Wall Street giant cut its demand expectations by 1.4 million barrels.

"We had at the beginning of the year expected there would be around 3.6 million barrels a day of demand increase year over year. We're now down to 2.2 million barrels a day," he said.

"That's a big difference if you are pulling on a refining system that is under duress," Morse added. "A world staring at a recession is not a world with robust demand growth for diesel."

Recession concerns around the world have mounted recently. The World Bank warned that the Russia-Ukraine war has caused commodity prices to rise to such an extent that a global recession may now be inevitable.

"As we look at the global GDP ... it's hard right now to see how we avoid a recession," World Bank President David Malpass told the US Chamber of Commerce last week, according to a Reuters report. "The idea of energy prices doubling is enough to trigger a recession by itself."