The biggest gathering of oil traders in the world’s hottest market is drawing to a close.
As they leave Singapore and head back to their desks in Geneva, Houston and Shanghai, the mood is the most bullish it’s been in years.
There’s talk of $100 oil again amid a growing realization that sanctions against Iran may reduce its exports more than anticipated. Demand growth is also looking robust.
There are a few wildcards, though, that are giving the industry pause for thought. New rules on the sulfur content in shipping fuel are drawing ever closer and creating uncertainty, while there’s an underlying fear that a fresh onslaught of U.S. shale could upend the bullish narrative in the longer-term.
Here’s a roundup of the key takeaways from this year’s Asia Pacific Petroleum Conference (APPEC) that ended in Singapore on Wednesday.
It seems almost everyone is bullish in the short-term and the only thing separating them is how high they think oil can go. Hours after OPEC rebuffed U.S. President Donald Trump’s call for lower prices over the weekend, trading giants Mercuria Energy Group Ltd. and Trafigura Group predicted the return of $100 crude for the first time since 2014.
While BP Plc said such an advance could be fleeting and Goldman Sachs Group Inc. later questioned the potential for a spike, it wasn’t enough to damp the prevailing mood in Singapore that it’s a good time to be long. Indeed, the total number of Brent options has surged to the highest ever, driven by record call trading, including bets on $100.
Mind the Gap
Warnings of three-figure oil are principally founded on the view that the impact of the U.S. sanctions against Iran is being underestimated. Mercuria sees 2 million barrels a day of supplies potentially disappearing in the fourth quarter, while Trafigura puts it at 1.5 million barrels a day, well above the 300,000 to 700,000 barrels it believes the market was initially estimating.
In a sign of how serious crude buyers are taking the sanctions, India isn’t planning to buy any Iranian oil in November, raising the prospect that Tehran will lose its second-biggest customer after South Korea and Japan already stopped purchases. If China follows suit, Iran’s exports would effectively stop. An Iraqi official told reporters in Singapore that the country is seeing additional demand from customers seeking to replace Iranian oil.
Not So Shipshape
While speculation over the immediate fate of Iran’s crude dominated the conversation at APPEC, executives were also focused on a longer-term risk. Norway’s state-controlled Equinor ASA says the market isn’t fully prepared for 2020, when the world’s ships need to comply with tough new fuel rules set by the International Maritime Organization to cut sulfur emissions.
Top trader Vitol Group sees volatile times ahead due at least in part to the new regulations, and Total SA expects new crude flows to emerge as demand rises for crude with lower polluting content. Iraq’s state oil company predicts prices for high-sulfur oil will need to fall. The IMO, for its part, says there will be no delays to when the rules will start being implemented and that cheaters will face greater scrutiny.
U.S. shale is the perennial party-pooper for oil bulls and was never far from conversation during APPEC. The higher prices rise the greater the incentive to pump more, but at the moment, output in the Permian Basin, the most prolific of the shale plays, is butting up against pipeline capacity. That will constrain supply through 2020, according to producer Pioneer Natural Resources Ltd.
By mid-2020, though, new pipelines will boost capacity and Permian output will quickly fill that to lift total U.S. output to a record 15 million barrels a day by 2025, Pioneer’s chairman said in Singapore. While constraints are helping lift prices now, the flood of Permian oil that will be unleashed by new pipelines in late 2019 and 2020 could cause oil prices to crash, according to Bank of America Merrill Lynch.
Don’t Forget Demand
The market may be too fixated on supply, according to BP’s head of trading in Asia. Any spike on the loss of Iranian supply probably won’t be sustainable in the long run, she said, because the negative impact on demand from a trade war between the world’s two biggest economies hasn’t been priced into crude yet.
What’s more, a slump in emerging market currencies such as India’s rupee is making dollar-denominated crude increasingly expensive in key demand centers. Consumers aren’t happy, refining executives told the APPEC gathering. Add that to the impact of the trade war and rising interest rates, and there’s a cocktail for a slowdown in demand.
So far, the International Energy Agency doesn’t see it, predicting Asia-Pacific consumption growth accelerating to 1.5 million barrels a day next year. The bulls cite a lack of any data so far that suggest consumption growth is slowing. While bears largely agree for the very short term, they caution that the impact is delayed and would become evident come the second quarter of 2019.