Oil Market at Risk: Trafigura Warns of Impending Price Spikes Due to Low Inventories and Underinvestment
Global commodities trading firm Trafigura's co-head of oil trading, Ben Luckock, warns of potential oil price spikes due to low inventories, underinvestment, and supply cuts, with risks tilted to the upside despite market consensus. He also comments on the U.S. economy and challenges faced by Russia.
According to Ben Luckock, the co-head of oil trading at global commodities trading firm Trafigura, the oil market is vulnerable to price spikes due to low inventories and underinvestment in new oilfields. While the market sees the fair price for oil at $72 to $88 per barrel, Luckock believes that the risks are to the upside. He mentioned that the long-term underinvestment in new oilfields and higher interest rates, which make it more expensive to hold oil in storage, are factors that could contribute to price spikes. Luckock also commented on the U.S. economy, stating that it is doing incredibly well and has been resilient through rising interest rates.
MAJOR COMMODITIES TRADER TRAFIGURA IS WARNING OIL PRICES COULD SPIKE AS LOW INVENTORIES AND UNDERINVESTMENT SQUEEZE THE MARKET
— Jade Schouten (@Jadeschouten103) September 5, 2023
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He suspects that there may be further interest rate increases from the U.S. Federal Reserve to fight inflation. In terms of supply cuts, Luckock believes that Saudi Arabia is likely to roll over their voluntary oil cut of 1 million barrels per day into October for a fourth consecutive month. He also expects them to taper their supply cuts into the year-end, although he doesn't anticipate it being a significant move. Luckock mentioned that the gasoil market is currently very strong, even outside of the maintenance period for refineries when it is usually strong. He also highlighted the challenges Russia faces in evacuating their crude products out of the country, which could prolong tighter supplies.
Last week, Russia announced that it had agreed with OPEC to reduce oil exports, but the credibility of these cuts has historically been a concern. In summary, Trafigura believes that the oil market is more fragile than it appears. Factors such as low inventories, underinvestment, higher interest rates, and supply cuts could potentially lead to price spikes. The market consensus may be for prices to remain near current levels, but the risks are tilted to the upside according to Luckock.
