(Investing) – Citi analysts said Wednesday that oil prices may continue to benefit from elevated geopolitical risk premiums in the near term, but they warned that oversupply risks in 2026 could limit further upside.
In a new research note examining the offshore drilling sector, Citi outlines its base case assumptions and market outlook for dayrates and oil pricing fundamentals.
“The Offshore Driller stocks have rallied hard off their April lows, rising 20% over the past month,” Citi noted, outperforming the broader Oil Services Index (OIH), which rose 9%.
The rally, analysts said, suggests investors are now pricing in sustained dayrates of around $385,000 per day for 7th generation deepwater rigs.
Citi said that while it expects “base dayrates to slip below $400kpd,” it believes that with “performance bonuses the Drillers should be able to hold effective rates around $400kpd.”
However, the firm sees limits to upside as supply begins to pick up: “We believe these levels balance the potential benefit of an extended period of elevated geopolitical risk premium within oil prices against the potential downside of oil market oversupply into 2026.”
Among the offshore drillers, Citi highlighted Seadrill (OL:) as the most attractive, forecasting a free cash flow yield of more than 20% in 2027 at $400,000 dayrates.
They note that Transocean (NYSE:), meanwhile, trades at a premium due to stronger contract coverage.
Citi ran multiple scenarios through its models, with its bull case assuming dayrates of $450,000 and rig activity increasing, while its bear case forecast rates falling to $350,000 with declining activity.
The firm’s revised models “reflect slightly lower dayrates of $400kpd for 7th generation and $300kpd for 6th generation” rigs.
