BNP Strategist Says $90 is the Sweet Spot for Oil

BNP Strategist Says $90 is the Sweet Spot for Oil

I’ve got to say, I’m a bit surprised just taking a step back at some of the price action that we’ve seen in oil over the last couple of weeks. I would have thought with the geopolitical premium around the Middle East, concerns about what’s happening, Israel, Gaza, that that would have had more of an impact on the price of oil. In addition to that, we know that for a while now, you know, since at the end of last year, Opec+ had been actively taking barrels off the market. Why isn’t oil more supported? Yeah, thanks, Your Honor, and thanks for having me. Yeah, sure. Look, it’s been it’s been a reasonably wild ride. So if you go back through the last couple of months, I think we went to 91st on effectively people seeing the actual opec+ materializing to a large extent and seeing a bigger risk premium, I suppose, out of the Middle East being priced in. I think the reason to drop off, we’ve seen it’s a few reasons. It is I think, a risk premium being priced out. And it’s also if you look at the fundamental side of things. April is the weakest month for refinery runs seasonally, so you will always see low demand in April. And I think we’re partly seeing a correction to what I think right now, 83 ish, probably quite close to fair value given where we are in the year in April. How is positioning right now? Often, it’s often the case that when you see moves like this, the main culprit is just that people got too long. And I wonder whether, given the pullback that we’ve seen again over the last couple of weeks, that some of that long positioning has started to get trimmed. Yeah, very much so. You basically have seen the launch from from early April, effectively. Dave DAVIES stepped out of the markets and that helped helped the trend down basically. Now you see much lower long positioning in the market, which means that the levels we are at currently, you’re probably going to see them for, I would think for a while in that people are probably and we can talk about that, but people are probably relatively bullish a bit further out in Q3. In Q2, I think people tend to be a little bit more conservative, particularly on seeing refinery margins being very low, worries about Chinese demand. And so I think the long positions coming back, they will come back probably, but not anytime soon. I think May, June might still remain relatively weak and interesting. Well, let’s talk about the next big event for the market. That is the upcoming Opec+ meeting. I’ve got to be honest, I haven’t seen one analyst out there that is expecting a change in production levels. What have you penciled in and why do you think they are going to stand pat? Why are they not going to change the quota guidance? No, I mean, the short answer is we’re not at the right price. So basically, again, we’ve seen these expectations shift. So we’ve been consistent on seeing OPEC stay the course through the entire year, effectively from June onwards. But in April, when prices hit above 90, you start seeing people making outlooks, and that’s probably in Q3 when the market will be tightest. Maybe there’s an opportunity to bring some supply back. Right now, we’re not close to 90. I think we’re going to go there in Q3. But the sweet spot, I think is around 90, maybe even a little bit higher in terms of the structural price. Opec+ would probably want to have the means. You need to be quite a bit above it for quite a while before you start bringing supplies because it will come off. So I think right now not many people will see the fundamentals supportive to to start bringing supplies back. And we still believe that even in Q3, Q4, OpEx will have to stay the course to keep prices close to their Aspire level. And, you know, we’re here in the Qatar Economic Forum, and I’m going to be speaking to many people on the ground, including the Saudi finance minister. You’ve actually inspired me to ask the question there. Let me ask you why you think $90 is that magic number and is it a number that Opec+ would like to see, or is it a number that you think the Saudis would like to see because it will help them balance their budget? Yeah, it’s the latter. So, look, it’s tricky because every every opec+ member, of course, has a different price. They’d like to see What what we tend to use as a gauge is, is fiscal break evens for Saudi, which seems to be consensus around 90. I see some people going to 85. I saw the IMF going to 100 because their exports go down. But 90 ish seems to be a reasonable gauge. And again, to me that means you need to be well above 90 for at least another week, but for probably a month, maybe two, before you really can see significant supplies come back. And right now, as you can see on the screen, the market is not there. We might get there in Q3, but not in Q2.

Aldo Spanjer, BNP Paribas, Senior Commodities Desk Strategist discusses where oil prices may be headed. He speaks with Joumanna Bercetche on Horizons Middle East & Africa.
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