Citi is out with a new take on crude, which is pretty interesting in the context of Goldman’s “green shoots,” note and against what certainly appears to be a brightening fundamental picture.

As we detailed earlier today, oil hit an 8-week high on Wednesday, buoyed by EIA data which largely confirmed Tuesday’s bullish API numbers, jitters about Venezuela, and promises of a cap on Saudi exports. Then, after the bell, we learned that Whiting is cutting its 2017 budget by 14% to $950 million. That came one day after Anadarko announced plans to cut spending.

“It’s been a bullish week certainly, data-wise,” John Kilduff, a partner at Again Capital, a N.Y.-based hedge fund, said earlier on Thursday. “There is an impression that we’re coming into balance finally and it’s driven by this pretty steep decline in U.S. crude oil inventories.”

As far as price action, crude has had a highly amusing day, plunging on heavy volume early in the session only to reverse course and head higher a little over an hour later.

Getting back to the Citi note mentioned here at the outset, the bank notes that despite all kinds of headline risk, “there’s no geopolitical risk premium in the oil price.”

First, Citi notes that the return of Libyan and Nigerian supply is tenuous and in any event, the Venezuela wild card along with sanctions against Iran and Russia have to be factored in:

… the return of disrupted Libyan and Nigerian supply has offset a significant chunk of the OPEC/non-OPEC oil production cuts, but this could reverse, along with disruption risk in Venezuela. 

Global oil supply disruptions remain at very low levels relative to the last 5 years, yet there is no shortage of potential catalysts that could trigger an increase in offline oil. US/UN interactions with Venezuela, Iran and Russia could escalate quickly if unintended consequences of sanctions policies spur more antagonistic behavior by these countries.

On Venezuela, Citi warns that we’ve reached “the point of no return” beyond which the potential for a deeper disruption rises materially:

Venezuela’s social, economic and political crisis has accelerated and deepened over the course of 2016 and appears to have reached a point of no return, with dramatic impacts on the country’s oil sector...it appears that the likelihood of a collapse in production has grown to the 50% range or higher, even without the imposition of further sanctions.

Venezuelan disruption risk seems the most palpable and likely over the course of 2017. Over the short-to medium term, Venezuelan production exports should continue to decline, where the current rate of decrease would put production at 1.65-m b/d by year end and 1.3-m b/d by end 2018; but a sharper drop could occur at any time, whether by 500-k b/d, 1-m b/d, or a full 1.9-m b/d.

Next, Citi describes what it calls the dawn of the “Trump Doctrine”, part and parcel of which is preserving the integrity of “red lines.”

For lack of a better way to summarize, Citi basically says that in order to preserve his image as an international badass, it’s probable that Trump turns up the heat on Venezuela.

“And then there are still more sanctions to consider,” Citi writes.

The bottom line is that this seems like a shit load of geopolitical risk that’s deserving of some kind of premium in oil prices.

With regard to that, Citi has the following to say:

... the volatility of the implied vol itself has declined to the lowest level since 2Q’14.

While this partly reflects the current low vol environment across the commodity complex...it might also be driven by a lack of near-term event risks in oil markets since the May OPEC meeting.

And:

… we view this as a good opportunity to add to their long exposure with cheap optionality, especially with global oil inventories continuing to tighten and geopolitics heating up again. The implied vol can re-price sharply higher if supply disruptions rise meaningfully or if the bearish market sentiment reverses quickly.

So I suppose the takeaway here if you’re a bull is that the potential exists for still more upside based on a repricing consistent with the palpable geopolitical risk.

Of course none of this necessarily has to materialize, but given the fact that so many of the players (Maduro, Trump, the Saudis, etc.) can very fairly be described as irrational actors, someone seems bound to step on a land mine at some point.