U.S. oil inventories rise above estimates as shale growth slows
As the oil industry’s top executives gathered in London for one of the most important events of the year their view on crude prices was clear: they’ll struggle next year.
Vitol SA Chief Executive Officer Russel Hardy told the Oil & Money conference on Wednesday that the ongoing U.S.-China trade dispute was curbing the outlook for crude prices which would be stuck in the US$50s a year from now. The bosses of fellow commodity traders Trafigura Group Ltd. and Gunvor Group Ltd. agreed, at least in the short term.
“Without some resolution to the trade wars then we’ll remain a little bearish,” said Hardy.
For months, the oil market has been focused on a worsening demand outlook and trade tensions between the world’s two biggest economies with the bearish mood only briefly pierced by attacks on Saudi Arabia’s energy infrastructure.
Trafigura CEO Jeremy Weir said the trading house expects a slight recovery in the fourth quarter of 2019 with prices “maybe slightly lower from where we are now” in a year’s time.
“Particularly with the current trade environment and a strong U.S. dollar, I would say there’s further downside in the short term,” said Weir.
Gunvor CEO Torbjorn Toernqvist said he also sees oil at current levels, of under US$60 a barrel, a year from now and that next year the market would “test OPEC’s resolve” on its commitment to coordinated output cuts. The current production cuts deal, agreed by the Organization of Petroleum Exporting Countries and its allies, is due to expire in March 2020.
Analysts at the conference echoed the view of trading houses, saying they saw the oil market remaining amply supplied next year.
Jeffrey Currie, head of commodities research at Goldman Sach Group Inc., sees Brent crude at US$60 over the next two years. The market is pricing in plenty of supply and demand is a concern, Jan Stuart, global energy economist at Cornerstone Macro LLC added.
Missing Geopolitical Risk
Royal Dutch Shell Plc boss Ben van Beurden however said he was surprised prices weren’t higher than current levels, following the worst-ever attack on Saudi Arabia’s energy infrastructure last month.
“It’s a but puzzling in a way but shows how good the response of Saudi Aramco has been,” van Beurden told Bloomberg TV on Wednesday. “The market is a little bit anesthetized by trade wars and the glut of shale to the point where it has become blase about geopolitical risk. I think it’s not representative of the real picture.”
Gunvor’s Toernqvist agreed, adding that it seems that there is currently no risk premium on oil prices.
“It’s amazing that prices are at low-end of where they were before attack,” Toernqvist said.
Saudi Aramco CEO Amin Nasser said the kingdom may beat its end-of-November target to restore output capacity to 12 million barrels a day, having already reached pre-attack production levels. The company is targeting production of around 9.9 million barrels a day for October.
“We made sure customers received shipments even during the attacks,” Nasser said.
“Five years ago the market reaction would’ve been bigger,” Shell’s van Beurden said in the Bloomberg TV interview. “The geopolitical risk premium is low in market now. “The unthinkable may happen again and we should factor that in.”
But over the longer-term, oil executives see crude prices rising because of a lack of investment now in new projects. Gunvor’s CEO said prices could reach between US$70-US$80 a barrel in five years without the right investment.
“If we do not invest today, prices could go there. It is cyclical. Prices will respond to the level of investment over time. Putting off long-term investment is a concern,” Tornqvist said.