Largest oil trader says bottom not yet in: is he right, or short?

February 10, 2015 09:46 AM

The world’s biggest independent oil trader said crude could resume a slump that saw prices fall 61% between June and January, as unrelenting growth in U.S. output leads to a “dramatic” build in the nation’s stockpiles.

The oil market seems slightly oversupplied and another downward move is possible in the first half of this year, Ian Taylor, chief executive officer of Vitol Group, said Tuesday. There are no signs of slowing U.S. output even as the country’s drillers idle rigs, he said. Oil inventories in industrialized nations may climb near a record 2.83 billion barrels by the middle of the year because supplies remain abundant, the International Energy Agency said in a report.

Brent crude, a global benchmark, has rallied 29% from its low point this year. It’s still down by half from last year’s peak as the U.S. pumps the most oil in three decades and OPEC responds by maintaining its own output to keep market share. While companies have pulled rigs off oil fields and cut billions of dollars of planned spending, it will be some time before there is an impact on production, according to the IEA.

“The market looks a little bit long in the first half of the year,” Taylor said in an interview at a conference in London. “We think there are going to be quite dramatic builds in stock for the next few months” before the market moves into balance in the second half.

Extreme Cuts

The IEA, a Paris-based adviser to 29 nations, cut its forecast for oil-supply growth from nations outside the Organization of Petroleum Exporting Countries for a second consecutive month Tuesday, citing cuts in company spending. Production will increase by 800,000 barrels a day this year, the slowest rate expansion since 2012 and down from an estimate of 1.3 million a day in December.

“Extreme cuts in investment in output now could lead to an oil deficit by the fourth quarter,” Igor Sechin, chief executive of Russia’s largest oil producer OAO Rosneft, said in a speech at the London conference.

The price slump has prompted retrenchment across the industry with companies including Chevron Corp. and Royal Dutch Shell Plc announcing more than $40 billion in spending cuts since Nov. 1. Investments across the whole industry might drop by about $100 billion this year, according to the IEA.

Rosneft’s projects are viable with crude at $50 a barrel and investments won’t be cut from the 2014 level, Sechin said. The company’s output will remain unchanged this year, he said.

While prices probably aren’t sustainable at current levels in the long term they will remain “relatively modest for the foreseeable future,” said Vitol’s Taylor. Vitol trades more than 5 million barrels of crude and fuels each day, according to data on its website.

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