Global Markets: Trafigura Still Sees Higher Prices In 2019

Three weeks ago, when Brent Crude prices hit $80 a barrel on fears of an imminent supply crunch with the Iran sanctions, one of the world’s top oil traders—Trafigura—was one of the first to start talking about a return of $100 oil.

Three weeks later, Brent Crude is again trading at nearly $80 as of early Thursday, having dropped from the four-year highs of $86 hit two weeks ago. Oil prices started to slide from those four-year highs after the market began questioning the health of global economic growth and oil demand growth and after last week’s major equity market sell-off spread to commodities.

Yet, Trafigura continues to be bullish on oil prices for this year and next. The risk is more to the upside, top executives at Trafigura said at the Argus Global Crude Conference in Geneva on Wednesday.

Strong oil demand growth this year, slim spare capacity in the world, chronic underinvestment in long-lead projects in deep and ultra-deep water, new refineries coming online next year, and the pipeline constraints in the Permian are the key reasons why Trafigura’s chief economist Saad Rahim and co-head of oil trading Ben Luckock continue to believe that oil prices are more likely to head up than down.

Three weeks ago, Trafigura was one of the first to predict that oil prices could rise to $100by the end of this year.

“We are at $80 today. I think it is entirely plausible that you are at $90 by Christmas and you are probably going to trade $100 in the New Year,” Luckock said at a conference in Singapore on September 24.

Some of the other major oil traders, however, have a markedly more bearish view on oil prices.

At the Oil & Money conference in London last week, the top executives of Vitol, Trafigura, Gunvor, and Glencore predicted the price of oil next year at between $65 and $100 a barrel due to a combination of many other factors apart from the U.S. sanctions on Iran.

While Vitol Group chairman Ian Taylor is the most bearish among the top oil traders, seeing Brent Crude at $65 a barrel next year, Trafigura’s chief executive Jeremy Weir is the most bullish and says he wouldn’t be surprised to see oil hitting $100 per barrel by the end of next year.

“I’m pretty bullish. In the short term we’ve already got the stars aligned here. Consumption is still increasing . . . Iran is there, so it’s looking quite positive into year end before even talking about the speculative influence which tends to make things overshoot,” the Financial Times quoted Weir as telling the London conference.

At the Geneva conference this week, Trafigura’s Rahim said he expected global oil demand growth at 1.6 million bpd-1.7 million bpd this year, with growth coming not only from leading growth drivers China and India, but also from the United States and Europe.

Trafigura’s demand growth projection is way above the forecast of Vitol, which has just reduced its oil demand growth forecast for this year from 1.6 million bpd to about 1.35 million bpd, expecting demand destruction ahead at these oil price levels.

Looking to next year, Trafigura’s Luckock said at the Geneva conference that spare capacity is too thin and would struggle to offset losses from Venezuela and Iran, while demand would spike because a combined 1.5 million bpd of new refineries—new demand—are planned to come on stream in the world over the next 12 months in China, Malaysia, Saudi Arabia, and Turkey.

The Permian oil production can’t be viewed as a short-term solution to add more supply on the global market, because of insufficient pipeline capacity to take the oil to export terminals, according to Trafigura.

Luckock also pointed to the global underinvestment in new conventional projects, of which the market and analysts “don’t talk about every day.”

“These are long lead time projects that you can’t replace quickly,” Reuters quoted Luckock as saying.

Trafigura holds the most bullish view among the top oil traders, while Vitol and Gunvor see oil prices dropping from current levels—Vitol predicts $65 a barrel Brent next year, while Gunvor forecasts $70-75. Once a key uncertainty in the market—how much Iranian oil will come off—is removed, we’ll see early next year who got that oil price prediction right. By Tsvetana Paraskova for Oilprice.com