Singapore — Oil prices are likely to head towards $50/b in the next six months in light of the global economic slowdown, unless OPEC makes larger production cuts, Ben Luckock, co-head of oil trading at commodities trading house Trafigura, told S&P Global Platts on the sidelines of the APPEC conference over September 9-11 in Singapore.
"We are worried about the underlying sort of macro-economic set of fundamentals. We see a number of bearish headwinds from the market, which exacerbated by a trade war does not seem to be coming to a conclusion anytime soon," Luckock said in an interview.
He added that trade uncertainty between the US and China is especially a concern when "an international commodity trader cannot assess how the trade war is going based on whether a phone call is made for a meeting set in a month's time," highlighting the unpredictability the Trump administration has brought to the market.
Trafigura's downbeat assessment of the oil market is a far cry from last year's APPEC when oil traders warned of the possibility of $100/b oil on the back of sanctions on Iran and healthy oil demand. Since then, demand growth has slowed with S&P Global Platts Analytics putting oil demand on "negative watch", while Iran's supply shortfall was offset first by waivers and then by record US production growth.
STRAIT OF HORMUZ
Indeed, even geopolitical tensions across the Middle East, with a number of incidents near the strategically important Strait of Hormuz in recent months failed to move the dial on oil prices, a point Luckock was keen to make.
"It shows you how problematic the market is right now and even that [incidents near the Strait of Hormuz] cannot help the market get ahead of itself," he noted, suggesting that the glut will be tough to shift. The Strait of Hormuz is the most important oil chokepoint with more than 20% of global petroleum liquids demand flowing through the narrow waterway.
Overwhelmingly bearish economic sentiment has sent oil prices spiraling lower. They are now 20% below their 2019 high seen in late April. OPEC's continued commitment to keep crude production limited, in conjunction with US economic sanctions on Iran and Venezuela had lifted front-month ICE Brent crude futures above the $75/b mark in April.
However, oil prices turned lower as Beijing's counter tariffs on US goods announced last month prompted energy and financial market participants to unwind their long paper positions on concerns over a wider slowdown in China as the trade row escalates and its detrimental impact on oil demand.
Brent futures fell below $56/b on August 7, the lowest level since January 7. The front-month futures contract was last quoted at $62.41/b at 0212 GMT Wednesday.
$70/B OIL AHEAD
Luckock does see the market turning upwards after six months, but whether OPEC, Russia and its allies have the patience and confidence in a recovery is open to question as it heads into a key monitoring committee meeting on Thursday.
The OPEC pact has agreed to cut 1.2 million b/d until the end of the first quarter of 2020, with Saudi Arabia trying its best to accelerate the market rebalancing by cutting close to 600,000 b/d more than its agreed quota according to Platts' OPEC monthly survey.
However, some OPEC members such as Iraq and Nigeria have been laggards in complying with their quotas.
"I think OPEC has been pretty good but...I think they need to do more than they are currently rather than less," Luckock said. Oil prices have been hovering just above the $60/b mark, but have ticked upwards on an improved US oil stock picture, which may encourage OPEC to stay on its current course.
The trader was upbeat for the early part of the next decade, predicting buyers and sellers in the industry will converge around a return to $70/b oil. "In the medium to longer term of two to five years the market should return to a price somewhere in the 70s/b, that kind of range. That's a good price for the oil industry as a whole looking forward."
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