Steep fall in oil prices likely says top trader Vitol
London, November 5, 2013
Oil prices could drop by as much as $15 per barrel should countries such as Libya restore production and sanctions on Iran be eased, forcing some of the most expensive US oil projects to stop pumping, the head of the world's largest oil trader said.
Ian Taylor, chief executive of Swiss trading house Vitol , said he also expected a number of European refineries to close in the next few years under tremendous competitive pressure from rivals in the Middle East and Asia.
"We see a constant structural length in the dated Brent market and the West African sweet market and we are not quite sure how it clears yet," Taylor told the Reuters Global Commodities Summit.
"If Libya does come back, God knows where that oil goes... And goodness knows what happens if Iran comes back."
"Perhaps the only way the market can actually clear properly is to begin to threaten the lower ranges, and therefore begin to threaten some of the higher cost developments and production."
The US is set to become the world's biggest oil producer next year, overtaking Russia, and a spike in US oil production has helped offset big supply outages from Libya, Iraq, Iran and Nigeria in recent months.
Taylor said that if most supply problems were solved, European benchmark Brent prices could come down to $90-$95 per barrel from the current $105 while US WTI prices may decline to $80-$85 from the current $95.
"Then I think Opec might begin to get worried," said Taylor.
Vitol made a foray into European refining last year and Taylor said the company could look at new opportunities in the future although he said the sector would have to shrink as it faces very low profitability on refining crude into products.
"It has been a disaster over the last two or three months as you all know... I believe that significant portions of the European refining business probably need to close over the next three or four years," he said.
Taylor said he could see up to one million barrels per day or a roughly one tenth of current capacity in Europe closing down, especially outdated refineries in the Mediterranean.
"I think you're going to see a constant battle between the big European majors, Europe, the politicians about this... I'm not sure what the result is going to be but the answer is we know the UK does not need seven or eight refineries."
He added that Vitol could still buy plants.
"It depends what else it brings. If it brings a lot of flow with it you could always value your refinery in a negative sense if there are a lot of other things you get with the deal. But certainly I don't think you are going to see us keen to pay multiples for refining businesses".
Vitol and most of its rivals such as Glencore or Gunvor have been chasing bigger trading volumes in recent years to compensate for shrinking profitability amid lower market volatility.
Taylor said he expected the trading environment to remain difficult as traders have to compete with traditional rivals such as oil majors but also increasingly with national oil companies aggressively pursuing incremental trading profits.
"I do expect it to be incredibly tough. I do expect to see a continuation of trading companies buying selective assets to try to increase their optimisation possibilities. Volumes among the trading houses will probably come off a little bit rather than increase because at the end of the day demand for oil isn't going up that much."
Taylor said that unless oil prices dropped sharply, there were realistic prospects for liquefied natural gas (LNG) to become a major fuel in the transport sector as big US and Chinese manufacturers were already shifting towards using gas.
"The pollution question in China is huge so they will shift more towards gas for transportation and in power (generation), no matter how high the price is," Taylor said.
The move will come largely at the cost of lower coal use, which is dirtier than gas but is still the world's dominant electricity fuel.
"I personally worry that coal is going to be a problem as demand will come off much faster than we think," Taylor said.
Natural gas is currently less profitable as a fuel for generating power but the US boom in shale gas drilling has led to a collapse in gas prices there. The US is expected to begin exporting LNG by 2015, which many users in Europe and Asia hope will help bring down prices there as well.
Taylor said Vitol was unlikely to invest into LNG assets on a big scale but added that smaller floating LNG terminals could be an option.
Asked whether Saudi Arabia would continue to sell large quantities of oil into the US given the weak price relative to sales elsewhere, Taylor said he could see reasons for Saudi Arabia to keep doing this from a strategic perspective, but no rationale for other exporters.
"For Venezuela and Mexico, who in some ways have greater revenue concerns than Saudi, arguably they shouldn't be putting any oil into the US at all at current differentials. The way differentials are at the moment, nobody should be exporting to the US at all." - Reuters