Oil & Energy
World’s Top Oil Trader Foresees Higher Prices
China’s restocking effort could be the next bullish catalyst for oil
– China does not appear to be as sensitive to high oil prices as South Asian nations are.
– The most recent positioning of the money managers shows there is still room for more long positioning in oil
– Even after hitting $93 per barrel last week, oil prices have further room to rise in the coming months, with the $100 oil forecast of major investment banks now in sight.
Robust oil demand and the headroom for money managers to expand their long positions in the crude complex, combined with shrinking global spare production capacity and “worrisome” inventory levels, could push oil prices even higher, the world’s largest independent oil trader, Vitol Group, says.
Demand recovery and the mild impact of the Omicron variant on consumption, alongside the Russia-Ukraine crisis and a deep freeze in Texas that disrupted some Permian oil production, sent WTI Crude to over $92 per barrel at the end of last week, while Brent Crude hit $93—levels at which the benchmarks continued to trade early on Monday.
Geopolitical tension aside, the market fundamentals appear strong, and China could add more strength if it moves to replenish some of its crude reserves, Mike Muller, Head of Vitol Asia, told Gulf Intelligence’s daily energy markets video podcast on Sunday.
China could begin filling its crude stocks, even at $90 a barrel oil, because some restocking could be needed, the executive at the world’s top oil trader said.
“I think it’s fair to state that China is at bare-minimum operating level in terms of the prescribed level of mandatory stockholding that state enterprises are meant to hold,” Muller said during the Gulf Intelligence podcast.
“All eyes are on what happens in China after the Chinese New Year because there’s a feeling that some restocking will be required,” he added.
“If you look at the spot behavior at the very front of the market it doesn’t look like they’ve had their foot off the pedal. Up until the very last day before Chinese New Year, the state-owned enterprises seemed interested in buying crude at these prices,” Muller said.
What is more, according to Vitol’s executive, China doesn’t appear to be as sensitive to high oil prices as South Asian nations are.
Overall, the front futures price structure is so backwardated that “the market is telling you: be careful, don’t be short because you are one disruption, one refinery wobble away from markets getting even stronger,” Muller noted.
Apart from the potential Chinese restocking after the Chinese New Year festivities end this week, the most recent positioning of the money managers shows there is still room for more long positioning in oil, according to Vitol and analysts.
In the latest reporting week to February 1, speculators were net sellers of crude oil for the third week. The net long—the difference between bullish and bearish bets—in WTI rose by 6,400 lots, but the Brent net-long dropped by 13,000 lots in the week to February 1.
Thus, the combined net long in the two most traded benchmarks was slightly reduced to 533,000 lots, which is some 200,000 lots below the June peak when prices traded 25 percent lower, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Sunday.
“Both WTI and Brent reached new cycle highs above $90 with rising front-month spreads signaling increased tightness. The combination of tight supply, inflation, the weaker dollar and the current turmoil in stocks and bonds are likely to have driven increased demand from paper investors, with asset managers and speculators at large funds seeking a haven to help weather the storm currently blowing across their traditional investment portfolios,” Hansen said in a weekly commodity marketanalysis on Friday.
According to ING strategists Warren Patterson and Wenyu Yao, “The options market is also proving supportive, with sellers of U$100/bbl calls having to hedge their position as the market nears the US$100/bbl level.”
$100 oil is in the cards this year, and it could be reached as soon as the second quarter, according to Bank of America, for example.
Tighter market balances, coupled with shrinking spare production capacity, have made a growing number of investment banks more bullish on oil. Major Wall Street banks, including Goldman Sachs, Bank of America, JP Morgan, and Morgan Stanley, expect prices to hit $100 a barrel as soon as this year.
Paraskova reports for Oilprice.com
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.
