With a softer approach to Iran, there is probably going to be a smoother transition and less of a price spike in oil than what the market was expecting in November, Chris Midgley, Head of Analytics, S&P Global Platts, tells ET Now.
What is your outlook on the crude prices after the fall yesterday? What are the next few events to watch out for?
Yes indeed. I saw the selloff yesterday. There was talk of Libya returning to the market with the blockade being lifted. It is hardly 3,000 barrels a day and that wont much effect the market. We have got some concerns about trade tariffs and what impact that might have on GDP. Therefore, it is a question of how much oil we are going to lose as a consequence of Iranian sanctions. For me, the fundamentals have not changed substantially.
What we did not talk about with this selloff is that we saw record draws of crude in the US yesterday as well — over 12 million barrels a day. Fundamentally, the market still remains relatively tight and we will see 1.3 million barrels a day of Iranian oil disappear from the market when we get to November as the sanctions hit, However, we are going to see softer implementation and this is really the US administrations fear of high oil prices. They have tried everything they can do to get as much oil put out to the market by OPEC but they realised that OPEC simply does not have enough spare capacity to make up for the Iranian capacity.
We are still a relatively bullish market with right fundamentals. With the softer approach to Iran, there is probably going to be smoother transition and less of a price spike than perhaps some of the market was expecting come November.
You are expecting a smoother transition in November. You do not expect prices to go up much from here?
Prices are likely to rise a little bit as we go into November. We see crude coming off from Iran. We are already seeing the Europeans take less secondary sanctions on banking and that means refiners and traders who have got exposure to US banking, already are taking less crude. We are still going to see some tightening or firming of the supply and demand balance but it will happen around November. That traditionally is a period of higher refinery maintenance and lower demand. So, it should see a smoother transition and oil prices are likely to trade around $75-80 mark.
We think there is enough supply in the market and oil prices wont rise above $80 and go into the $100 range which should be the price if you need to see some demand constraint. The call on demand for oil is in the high 70s. A little bit of selloff like yesterday is likely to see firming as we go forward.
Brent Futures is already up by a dollar as we speak. Should we expect prices around $75 to $80 as a view coming in from S&P Global Platts? I know you love crude. but I want to talk about other commodities as well. I want to talk about what is happening with metals round the world. What is your outlook when it comes to metals for the rest of the year?
Metals is not necessarily my expert area, but as you say, it is suffering from the same concerns around trade war. The trade war first hit the metals market creating huge uncertainty. It is leading to higher prices and that is also raising concerns around GDP growth. Already we are seeing GDP growth forecast softening by about 0.3%. All these things tend to have an impact on commodities.
It has started having an impact on oil but the fundamentals are relatively strong on the oil side. On the metal side, it is an issue around supply demand economics and how far the sanctions and tariffs bite into those commodities. Nickel prices are probably the ones which have been the most resilient in this period and that is interesting because of the link between metals and oil. Nickel is a significant component in batteries and with a rise of electric vehicles and batteries, we are seeing nickel cobalt lithium having far more support and interesting relationship there between energy and metals.
Are you expecting money to flow into the energy market? Secondly, when you are talking about a trade war, Donald Trump in the past has indicated that he will ensure stable oil prices. Is a rampup in Shale gas in the US likely?
Trump certainly would like to have more stable prices but the reality is that he is doing everything but helping that with those tweets which impact the markets significantly. The market is very finely balanced which takes just a little bit of disruption or uncertainty around demand to create relatively large moves as we saw yesterday.
The US is already producing 2 million barrels of shale oil a day more this year. That adds up to 1.4 million of oil, 0.6 million of what we call natural gas liquid the lighter cut from the barrel and a lot more gas. Gas Henry Hub Prices have pretty much flat line, they are trading in a range of around $75 for mmbtu and likely to stay there.
It is really a question of when the new liquefaction capacity is going to come in as that will stimulate a bit more demand. People talk about the US being a swing producer but the reality is it can bring on new oil relatively fast but those producers they are running as hard as they can to produce as much oil as they can produce today.