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 $50 a barrel.
Global oil prices fell sharply last month on signs of a slowing world economy and the on-going trade war between the United States and China.
"I expect a softer price in Q4 but it is unlikely to be sustained below $50 a barrel because that means $45 for shale, which would result in capex being cut," CEO Russell Hardy said.
For much of August, Brent crude futures traded below $60 a barrel. The contract has since rebounded to trade at around $60 with US WTI futures at around $56 a barrel.
Despite an OPEC-led production cut, oil has tumbled from April's 2019 peak above $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 build-up of inventories that could hit prices.
Though technological improvements have made US 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.
US 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 $60 a barrel in 2020 as another 2 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 US 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 US pipelines started up last month, easing an inland bottleneck as they are capable of carrying about 1 million bpd to US 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.
IMO AND CLEANER FUEL SUPPLIES
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% from the 3.5% 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."