Vitol CEO sees softer oil price in short term
Spurt of supply from Canada, Brazil projected to be among headwinds next year despite OPEC output cut
LONDON The chief executive of the world’s biggest oil trader, Vitol, told Reuters he expects a weaker oil price in the short term but does not see sustained levels below US$50 a barrel.
Global oil prices fell sharply last month on signs of a slowing world economy and the ongoing trade war between the United States and China.
“I expect a softer price in Q4 but it is unlikely to be sustained below US$50 a barrel because that means US$45 for shale, which would result in capex being cut,” CEO Russell Hardy said.
For much of August, Brent crude futures traded below US$60 a barrel. The contract has since rebounded to trade at around US$60 with U.S. WTI futures at around US$56 a barrel.
Despite an OPEC-led production cut, oil has tumbled from April’s 2019 peak above US$75 a barrel. In July, OPEC, Russia and other producers renewed a pact to cut output by 1.2 million bpd until March 2020 to avoid a buildup of inventories that could hit prices.
Though technological improvements have made U.S. shale extraction more efficient since the oil price crash in 2014, the still capital-intensive process remains vulnerable to low prices and drilling campaigns have already decelerated this year.
U.S. firms cut the number of oil rigs operating last month, taking the rig count to its lowest since January 2018.
Further ahead, Hardy said he expected an oil price around US$60 a barrel in 2020 as another two million barrels per day of supply hits the market.
“I see a few headwinds — a lot of supply is coming online from Brazil and Canada next year, the new U.S. pipelines will increase exports ... Equinor’s Johan Sverdrup is starting against a backdrop of demand that has been set back a little by the economic concerns,” Hardy said.
Two major U.S. pipelines started up last month, easing an inland bottleneck as they are capable of carrying about one million bpd to U.S. Gulf Coast while the Johan Sverdrup field in the North Sea is expected to reach a peak output of 440,000 bpd in summer 2020.
Supply side issues due to sanctions on Iran and Venezuela and potential outages in Libya could help balance the market.
From January next year, ships will have to adhere to new international fuel standards. The International Maritime Organisation has lowered the cap on sulphur content in shipping fuel to 0.5 per cent from the 3.5 per cent High Sulphur Fuel Oil in use now.
Ships with sulphur cleaner units called scrubbers will be able to still use HSFO but the vast majority have not installed these systems and will either need to use marine gasoil or Very Low Sulphur Fuel Oil (VLSFO).
It will be a seismic shift in the industry as refiners upgrade plants or adjust their crude quality intake to produce cleaner fuels for port operators, which need to anticipate the new needs.
Prices of heavy and medium sweet crude grades that are ideal for making VLSFO have already jumped and many analysts and traders expect a chaotic shift in January as the world adjusts.
Hardy expects there to be sufficient supplies of cleaner fuels at major hubs when the switch comes into effect in January but a tighter market later that year.
“Six weeks ago, we had the odd ship owner start to call to test VLSFO. Some customers bought cargoes to stock up ports. Demand hasn’t taken off yet but we expect it to do so in next month for bunkering,” he said.
“There will be adequate VLSFO supplies in the hubs to begin with and it will be cheap enough for shipowners to take VLSFO instead of gasoil. As 2020 progresses we expect the VLSFO market to remain very tight.”
In remote locations, such as South Africa’s Saldanha Bay, more marine gasoil will be stocked than in hubs like Singapore as there is insufficient demand to keep large amounts of VLSFO in stock, he added.
Vitol is building a small refinery at an oil storage site in Malaysia and its refinery in Fujairah is also ready to produce cleaner fuels.
He said HSFO availability has tightened with Singapore becoming very expensive while Russia and some other locations are showing cheaper offers as they destock.
“HSFO demand will decline into Christmas and we expect contango to set in, as reflected in the curve for next year.”
Reuters