World's Top Traders Say the Worst Is Over for Oil
By Andy Hoffman and Isis Almeida 4/12/16
Top executives at the world’s largest oil-trading houses said the worst of the market’s woes are probably over, with some predicting prices will climb to $50 a barrel by next year.
“The down market is behind us,” Torbjorn Tornqvist, chief executive officer of Gunvor Group Ltd., said on Tuesday at the FT Global Commodities Summit in Lausanne. “It is the beginning of the end of that for sure.”
Oil has rebounded after falling to the lowest level in more than 12 years amid signs a global glut will ease as U.S. output declines. The world’s largest oil traders were meeting in Switzerland as members of OPEC and other major producers prepare to assemble in Doha on April 17 to discuss an output freeze. Oil traders benefited from a surge in volatility last year and that should continue, according to Tornqvist.
“We are going to have lots of volatility going forward,” Tornqvist said. “From here on the trend is up.”
A “rebalancing” of global crude oil supply and demand could take place by the end of the third quarter as production cuts by cash-strapped producers start to curb the current glut, according to Trafigura Group Pte CEO Jeremy Weir.
“I believe we’ve seen the bottom unless there is some sort of catastrophic situation, political or otherwise,” Weir said.
When oil prices recently dipped below $28 it was a positive for crude as forward prices fell faster than current ones, prompting major production projects to be canceled, according to Marco Dunand, CEO of Mercuria Energy Group Ltd. “We anticipate the market to start a recovery and we see a $50 price next year,” he said.
The oil market is at the beginning of a multiyear bull run, with prices rising to $60 later this year and $80 in 2017, said Pierre Andurand, the chief investment officer of London-based hedge fund Andurand Capital Management LLP.
Brent crude, the international benchmark, climbed 1 percent to $43.27 a barrel, a four-month high, as of 2:21 p.m. on the London-based ICE Futures Europe exchange.
Alex Beard, head of oil at Glencore Plc, was less bullish about the recovery, noting that the global market added over 300 million barrels of crude and oil products into storage in the last 18 months.
“We hopefully will move into a rebalancing, but I don’t think it will come particularly quick,” Beard said. “We still have very large stockpiles to eat through.”
The trading executives were unanimous in predictions that oil production from Iran will be slower than expected to return to the market after the lifting of sanctions in January.
Ian Taylor, CEO of Vitol Group of Cos., the world’s largest independent oil trader, said getting capital into Iran to fund the restart of production remains difficult. Trafigura’s Weir said banks are still “wary” of financing deals to trade oil from Iran as U.S. sanctions remain in place for now.
Oil refining, which was a standout business for traders including Vitol and Gunvor in 2015, will probably earn lower margins in 2015, said Taylor. “It will be tougher this year,” said Gunvor’s Tornqvist.
Oil rises to four-month high as U.S. shale production slides
By Ben Sharples, Grant Smith 4/12/2016
LONDON (Bloomberg) -- Oil climbed to a four-month high in London as forecasts for lower U.S. shale production signaled the global oversupply will slowly diminish.
Brent advanced 1.6% to the highest since Dec. 4. Output from U.S. shale will drop to 4.84 MMbopd in May, the lowest level in almost two years, according to a report on Monday from the Energy Information Administration. Still, crude inventories probably rose by 1 MMbbl last week, remaining near the highest level since 1930, according to a Bloomberg survey before another report from the EIA on Wednesday.
“There is such overwhelming consensus in this market that we’re grinding higher because the story of supply faltering is starting to play out,” said Seth Kleinman, head of European energy research at Citigroup Inc. in London.
Oil has rebounded after falling to the lowest level in more than 12 years amid signs a global glut will ease as U.S. output declines. Saudi Arabia, the biggest producer in the Organization of Petroleum Exporting Countries, said it will agree to an output freeze only if it’s joined by other suppliers including Iran, while Kuwait said a deal can be done without Tehran’s support. OPEC members plan to meet with other major producers, including Russia, to discuss a freeze in the Qatari capital of Doha on April 17.
Brent for June settlement advanced as much as 70 cents to $43.53/bbl on the London-based ICE Futures Europe exchange. The contracts rose 89 cents, or 2.1%, to close at $42.83 Monday. The global benchmark was at a $1.21 premium to WTI for June.
West Texas Intermediate for May delivery was at $40.83/bbl on the New York Mercantile Exchange, up 47 cents, at 9:26 a.m. London time. The contract climbed 64 cents to $40.36 on Monday. Total volume traded was 19% below the 100-day average.
“We’ve now seen prices that are low enough that we’re starting to see a response on the supply side,” John Watson, chairman and CEO at Chevron Corp., said at a conference in Perth, Australia. “We’re seeing the markets come back into better balance. It may take more time.
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According to Joe Petrowski, Founder of Mercantor Partners, at its peak, the United States was producing almost 100 billion cubic feet of natural gas per day (bcf/day) - the equivalent of 1 billion barrels of oil. There were a number of factors that finally reduced the price of U.S. oil, but contrary to popular belief they weren't simply the great recession and the Saudi Arabia-Iran market share tussle. Fracking, and the immense stockpile of natural gas the United State has accumulated as a result, was a huge contributing factor. The actual proper ratio of natural gas to crude is as highly debated as gold to silver, largely because natural gas is quoted in dollars per million cubic feet while oil is quoted in barrels. But regardless of the exact ratio it is obvious that natural gas contributed to crude's collapse, and as such it is time to bet on natural gas as it is perfectly positioned to take a bigger slice of the market.
Natural gas enjoys an environmental advantage over crude, while crude has the edge when it comes to storage and transportation. However natural gas is eating in to crude's key advantages, which will have significant implications for both the petroleum and the natural gas market.
"Natural gas is beginning to fight for the transportation market," said Joe Petrowski, Founder of Mercantor Partners, and former CEO of Gulf Oil LP. "It's already significant in Class 6 to Class 8 heavy duty trucks, with many large shipping organizations converting their fleets. And we should soon see natural gas start breaking in to light duty vehicles, and ultimately small commercial and even residential vehicles."
The United States currently has about 240 million vehicles with an abnormally high average life span of nearly 11 years. This makes the market ripe for new production, and much of that will be natural gas based. China will likely follow soon, with 20 million vehicles at an even more advanced age. Current demand is approximately one bcf/day, but by 2020 the market could easily grow to five or even 10 bcf/day.
There is also a new natural gas market developing – exports. Mexico is already importing five billion cubic feet per day from the United States, and that will likely double in the next four years.
"Natural gas export facilities and pipelines are naturally being delayed by the usual factors (environmentalists and anti oil lobbyists), but the capacity for as much as 20 billion cubic feet per day already exists," continued Mr. Petrowski. "And despite the typical road blocks, new facilities will eventually get built, increasing U.S. power and influence and eliminating our trade imbalance. When one considers these two factors, it's clear we can expect a significant turnaround in gas prices, equity, and asset value."
Power demand and power supply are going in opposite directions. We continue to decommission coal and nuclear plants all while demand surges due to the proliferation of data centers and flat screen TV's. Power demand has dipped (13 bcf/day) recently due in large part to a warm winter, but it should pick back up as new home building strengthens, conversions from petroleum continue, and local distribution systems are upgraded."
U.S. natural gas production is robust at 73 bcf/day, but will drop into the high 60s by the fourth quarter this year due to a comparatively low rig count (464). However, the prospect of brownouts, blackouts, and a power price of 25 cents per kilowatt hour will be enough to win over even the most staunch opposition to natural gas.
Soon demand will outstrip supply by as much a 10 bcf/day, making the 5.7 trillion cubic feet stock number of November, 2015 move closer to 5.0 by November 1, 2016. This will certainly keep natural gas prices from collapsing, and it will likely hover closer to $4 per million BTU than $2 per million BTU..
"This is good for energy prices, good for the United States, and good for equity valuations," concluded Mr. Petrowski. "We should soon start to see natural gas fill the gap between demand and supply. And while the race doesn't always go to the fleet, and battle doesn't always go to the strong, that's always how you bet. Bet on natural gas, energy, and the United States.