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Citi: Here’s why oil prices may rise

Oil prices may be tanking in the wake of a failed attempt to freeze production, but Citi is betting on a recovery in prices.

Citi is forecasting declining supply from some producers, such as Venezuela and Nigeria, while inventories may finally see some drawdowns.

The bank now expects Brent and WTI prices at $39 and $38 a barrel respectively in the second quarter, up from forecasts of $31 for each. For the third quarter, Citi now forecasts Brent at $46 a barrel and WTI at $45, up from its previous forecasts of $41 and $40, respectively. For the fourth quarter, it held its forecasts steady at $52 a barrel for Brent and $50 for WTI.

That's despite the failure of a summit in Doha between the world's largest oil-producing countries to reach a deal on Sunday to freeze output in an effort to boost crude prices which have tumbled from levels well over $100 a barrel in mid-2014 amid a global supply glut.

The conference's failure sent U.S. crude futures down 5.6 percent to $38.10 a barrel in early Asian trade, while global benchmark Brent futures fell 5.66 percent to $40.66.

Nigerian oil minister Emmanuel Ibe Kachikwu (C) arrives for the organization of Petroleum Exporting Countries (OPEC) meeting, in the Qatari capital Doha, on April 17, 2016.US oil cuts losses, settles 1.4 pct lower

Even without an output freeze, Citi expects the supply glut may ease.

"After nearly two years of relentless stock builds, oil markets appear to be approaching a period of sustained draws, bringing key benchmark prices back to the $60s by 2017," it said. The bank expects a drawdown of supply may emerge over the summer, with demand from refineries set to increase.

At the same time, Citi expects supply may begin to ease. It expects non-OPEC production to fall by more than 1.1 million barrels a day this year.

"With petro-states confronting internal instability, risks of disruption point to a potentially more bullish market, while macroeconomic risks pose a lower probability of more softness ahead," it said.

Wilbur Ross predicts $35-$40 oil, no freeze at June OPEC meeting

It expects Venezuela, Nigeria and Algeria to all see declining supply growth on lack of investment, political instability and social unrest, while Iraqi output may flatline. In particular, it expects Venezuelan output could fall by around 200,000 barrels a day this year.

But Citi isn't expecting too much demand growth to ease the glut, adding that's due to — not despite — low oil prices. It noted that from 2003-2015, around 55 percent of global oil demand growth came from oil-exporting regions.

"High oil prices were bullish for oil demand," it said. "That feedback loop now is running in reverse."

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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