INTERVIEW: Mercuria CEO sees oil price upside over $40/b if OPEC+ extends output cuts

London — Global oil prices will likely hover above $40/b in the coming months supported by a faster than expected rebound in demand but could quickly push higher if OPEC and its producer allies decide to extend their existing output cuts, the CEO of energy trading group Mercuria said June 2.

As lockdowns ease, driving has already recovered close to pre-pandemic levels in China, the US and parts of Europe, and although industrial activity and jet fuel demand are still lagging, air travel is starting to pick up, Marco Dunand said.

Mercuria, one of the world's biggest independent oil traders, estimates that global oil demand is currently on track to return to "normal" levels of around 5 million b/d below the 2019 average of 100 million b/d, by the fourth quarter, he said.

"Every month [going forward this year] we see an increase in demand," Dunand told S&P Global Platts."It probably surprised the market a little bit because it has been faster than people would have anticipated."

Mercuria is anticipating a Brent oil price of around $40/b this year, Dunand said, limited on the downside by the further loss of US shale output and, on the upside, by some 1 billion barrels of surplus oil stocks.

But the prospect of an even faster market rebalancing has surfaced amid signs that some OPEC+ producers are keen to extend the existing cuts beyond June at a meeting as soon as June 4, he said.

DEEPER OPEC CUTS

The historic OPEC+ production cuts of 9.7 million b/d over May and June have already played a key role in lifting the market out of record lows it plunged to in April.

"We see a consensus between Saudis, US and non-OPEC members to get the market to $40/b. A sub-$40/b market creates a lot of pain for those countries...The question is, is there a consensus to get to $50/b, is there a consensus to get it higher?"

"If the current cuts were rolled over to the end of the year, we would expect by the first quarter of next year inventories would go back to pre-crisis levels and therefore potentially higher markets," he said.

With Brent crude futures bouncing back by 50% month-on-month in May and already trading over $39/b on June 2, Dunand said and "there is a chance that they may want to roll over as inventories are getting pretty high."

"We need to see the overhang of inventory coming down," he said. "When you have close 1 billion barrels of extra inventories it's very difficult for OPEC to monitor the market and control its pricing action."

Even without a rollover for the current OPEC+ cuts, oil prices would likely continue to firm into 2021, he said, with $50/b a "realistic target" assuming oil stocks start to contract.

TRADING PROFITS, RENEWABLES

Dunand said it too earlier to speculate on whether Mercuria will be able to capture trading margins from the price volatility and market dislocations caused by the pandemic lockdowns in first half of the year.

Commodity traders such as Mercuria can typically benefit from price volatility by arbitraging regional and time spreads such as in the wake of the global financial crisis in 2008 and the 2015 oil price slump.

But Dunand said profiting from a "contango play" by buying oil to store it and sell it at higher future prices, is more complex than some believe.

"When you have contango storage, and we obviously have access to storage, you have to finance them," he said, "We have to make sure you have the right quality, the blend, the delivery, the shipping, there's a lot of factors coming into this equation."

"I don't think that we're going to have a particularly abnormal year...This year, there was a particular need for a company to come in and perform a certain function, and we fulfill this need, and we'll see what happens for the rest of this year."

On the global push for cleaner, renewables fuels, Dunand said Mercuria is keen to expand its non-fossil fuel energy portfolio but its role is limited until there is a good level of market liquidity in new fuels.

"We don't normally go for cutting-edge technology because we don't think we have a competitive advantage," he said "We don't have geophysicists, we don't have a super technician or nuclear scientists...our job is to facilitate the entry of new technology into the market or to breach the gap in prices," he said.

On the growth of green hydrogen as a transport fuel and generation fuel, Dunand said Mercuria will look to enter the market "at some point" when demand picks up.

"We will help the development of it, but it has to have reached a certain maturity level. What we can do is to bring the reality of today's market with new technology," he said "...We see every day what real demand, real supply is, and we can bring to the reality check when someone comes with a new idea to say 'This idea is brilliant, but you have to wait a bit more'."