The CEOs of the world's largest oil trading houses issued their crude oil estimates during the Oil & Money conference in London this week. The executives gave different views on where crude will trade in 2019. But how much are they "talking their book" and what stocks should we buy or sell? Here's our thinking:
According to these executives, crude will trade between $65 and $100 per barrel in 2019, with the price primarily driven by U.S. sanctions on Iran and the relevant crude oil exports. However, this wide range illustrates the uncertainty around two factors: the impact of Iran sanctions on the supply side and a potential slowdown in emerging economies if crude oil generates demand destruction.
Trafigura CEO Jeremy Weir has been saying since late September that he wouldn't be surprised to see oil trading beyond $100 per barrel in 2019. But what is Trafigura's "book" telling us? Privately-held Trafigura is in the process of getting a permit to build a crude oil loading terminal in the Port of Corpus Christi so it can load up to 500,000 barrels per day into Very Large Crude Carriers (VLCC) in a bet that it will be able to accelerate the trading of Permian-sourced crude oil into the global markets. With a strong position in the U.S., they're the most bullish of all traders.
Right behind Trafigura's high estimate is Glencore (GLNCY) , where the head of Energy Products, Alex Beard, sees mid-term oil prices in the $85-$90 a barrel range. Baird thinks the Iran sanctions will be very tough and that waivers will be extremely limited. Glencore does not have a strong physical assets position in the U.S., but rather a global footprint with refineries and terminals around the world. As a result it stands to benefit from a crude oil rally.
Beard thinks a release of U.S. Strategic Petroleum Reserve capacity to ease the loss of Iranian supplies looks remote and would have limited impact anyway. Also, any plans by European nations seeking to maintain trade with Iran is unlikely to help. As we said in our earlier note, our top trade to leverage the spike in crude oil transportation is Frontline Ltd. (FRO) . In addition, U.S. infrastructure constraints would limit the amount of U.S. crude exports that would otherwise compensate for the Iran shortages, and new refining capacity coming online in 2019 will likely add further tightness in the market.
The next price range is $70-$75 a barrel issued by Torbjörn Törnqvist, CEO of Gunvor Group. Törnqvist sees a slowdown in demand growth and a well-supplied market. As we discussed earlier, demand destruction is expected as crude oil prices rally, hurting emerging economies, thus capping crude oil prices at some point.
Törnqvist said there could be some Iranian exports, but the amount would depend on global crude oil prices. If oil goes to $100 per barrel, Gunvor could see export waivers -- given the pressure on the markets. But if crude oil stays around $80 per barrel, Gunvor does not foresee any waivers. Gunvor does not have a strong presence in the U.S., but rather a footprint in Europe and Russia where it is a large oil and refined products trader.
Finally, the most bearish is Ian Tailor, chairman of Vitol. He is seeing the recent rally as a "fear factor" -- not a supply issue. Vitol's outlook for oil is at $65 per barrel in 2019. Vitol has reduced its global demand growth forecast for 2019, leaving open the question over whether the pipelines hauling crude oil from the Permian Basin will manage to boost transportation capacity then.
With crude prices rallying for four straight weeks, trading of crude oil call options has spiked. According to data from the InterContinental Exchange, the number of calls, or bullish contracts that pay out if Brent futures surpass $100 a barrel by January, is up 19% from the current level, which has more than doubled since the beginning of September.
If you have missed the recent crude oil rally, your next best is to buy long-dated calls on Brent crude oil futures or on the United States Brent Oil ETF (BNO) , which tracks the futures contract for Brent crude oil. We recommend buying the Jan. $25 BNO Calls, which have the greatest open interest.