Davos: The oil market is bottoming after Brent crude, the global benchmark, dropped below $30 a barrel earlier this week, according to one of the world’s largest independent energy trading houses.
"Oil producers are strained to the limit and some of them are pumping at a loss," Mercuria Energy Group Chief Executive Officer Marco Dunand said in an interview at the World Economic Forum in Davos, Switzerland. "We are reaching the bottom of the oil market."
Dunand cautioned about expecting a quick recovery, however, saying that companies might "produce at a loss for a short time because the other option — shutting down — in some cases is even more expensive."
Mercuria is one of the world’s five biggest independent oil traders alongside Vitol Group, Glencore, Trafigura and Gunvor Group. The company was founded by former Goldman Sachs Group bankers Dunand and Daniel Jaeggi in 2004.
The view of Dunand is more optimistic than others at Davos, including the International Energy Agency (IEA), which earlier this week warned that oil markets could "drown in oversupply," sending prices even lower. BP CEO Bob Dudley said the market was facing a "flood of oil," while Glencore Chairman Tony Hayward said "oversupply" would keep prices around current levels "for some time".
Dunand said Mercuria was witnessing unusual pain in the market, trading varieties of crude for as little as $10 a barrel while poor-quality fuel-oil sold for virtually nothing.
Brent crude fell to a 12-year low of $27.10 a barrel on Wednesday. Since then, the benchmark has rallied 14 per cent to trade at $31.06 a barrel at 1:30pm in London. West Texas Intermediate (WTI), the US benchmark, fell on Wednesday to $26.19 a barrel, its lowest since 2003.
The Chicago Board Options Exchange Crude Oil Volatility Index, a gauge of anticipated volatility in US crude prices, jumped to 67.93 on Wednesday, the highest level since March 2009.
Dunand said several factors have driven oil prices down this month, including concern about the return of Iran to the market and economic weakness in China. However, the most important — and overlooked -- factor was "the drop in forward prices brought about by producer hedging under pressure from banks to extend their loans," he said.
Brent futures for delivery in five years have dropped roughly $10 a barrel this year, compared with a drop of $8 a barrel for contracts for immediate delivery.
Dunand said prices were likely to rise in the next couple of years as the market feels the impact of the belt-tightening the energy industry is undergoing.
"I think that about $500 billion in production projects had been shelved between 2015 and 2016 — this would have an impact on future output," he said.
While most of the energy industry suffer because of low prices, commodity trading houses benefit from high volatility and opportunities to buy and store cheap crude while locking in a profit by selling forward at higher prices. Trafigura doubled earnings from oil trading to a record $1.7 billion in 2015.
Mercuria earlier this week announced it had sold a 12 per cent stake to China National Chemical Corp., the country’s largest chemical company and an oil refiner with about 500,000 barrels a day of processing capacity.