Q&A: Saxo Bank commodity head weighs in on market crisis

Ole Hansen, Saxo Bank's head of commodity strategy, answers our questions about the oil price, demand, and the path to recovery for the oil and gas industry

Oil price, Brent, Interview, Ole hansen, Saxo bank, Coronavirus, Covid-19

The market has been turbulent in the midst of the coronavirus pandemic. What was the impact of the last OPEC+ deal?

I think OPEC+ has done a fantastic job in not only cutting as much as they did, but also with compliance. It looks like we will be getting pretty close to compliance up in the 90% range, which is obviously what the market needs in this state. Extending the cuts to July really bought the market some more time to to normalise, for demand to recover. That’s why we’ve seen the market rally quite strongly. Now it’s hitting some kind of a plateau because there are still some risks related to the Covid-19 pandemic. That obviously does leave the market still in a tricky situation, because OPEC+ can control production. They cannot control demand. Demand really depends on how the global community continues to come out of this pandemic. ... Potentially, if you look at something like Brent crude for the next few months, I see that staying in the low $30s to low $40s range before eventually recovering further as we move deeper into into the second half of the year.

In a previous talk, I believe your prediction was a recovery in 2021 and probably not earlier than that. Can you speak more to that and elaborate?

It’s twofold because one thing is OPEC+ itself, a 9.7 billion barrels per day cut in production translates into spare capacity, and the producers want to get that supply back into the market in order to generate additional revenues when the price is ready for it. But reacting to the panic situation that we saw back in March and April, when the price of crude oil collapsed, it is really probably the trigger for the strong recovery that we’ve seen. The oil producers came to the conclusion that they had to do something drastic, but how they’re going to manage getting back to a normal situation is going to potentially become a bit of a challenge. That is one side of the equation. The other side is just simply demand.

So how do you see demand changing in the coming months?

I think at this stage, if we are very positive, potentially, we could see demand next year return to levels somewhere four to five million barrels below the peak we saw before the pandemic broke out. But at the same time, I’m working from home not because I have to anymorek, but because it’s a choice, because of how things have developed. And I think we’re going to see more people are going to take some time working from home. We’re going to see less traveling, and we’re going to see a slowdown in demand. But how much of a slowdown? We simply don’t know because we are still in the midst of this pandemic and we will have to see that when we come out on the other side.

In the interim, what are some of the steps that producers should be taking?

They are protecting themselves right now and what they can always do quickly is to cut back investments and costs. That is part of the recovery story, when we move towards 2021 and 2022, that the massive billions of dollars cut from future spending plans will potentially come back to bite the market. In the US, where easy access to credit over the past 10 years has helped create a bubble in terms of production, the question is whether lenders are prepared to throw good money after bad. We may see a leaner and perhaps a bit smarter US oil segment come out of this. I think the outlook for OPEC over the next five years is probably a good one. I think the market share will steadily increase.

What’s the timeline for real oil price recovery?

The question is more what is the price where everyone is happy. Before the pandemic broke out, we had settled into a $50 to $70 range, and if that is the target, then we should probably be looking to late 2020, early 2021. What we’re seeing right now, which has helped support the prices, is a strong speculative interest built up, especially in the US crude market from speculators. And we also saw that massive amount of retail investment in the US oil fund, which also helped drive demand for futures contracts, some of these movements will obviously always be there. That means the market can overshoot and we may overshoot sooner than I expect. But I think that ultimately fundamentals have to prevail and that will dictate the overall direction. Assuming that $50 to $70 is the range that everyone can can accept, we need to move closer to 2021, and perhaps on the other side of it.

What’s the timeline for real oil price recovery?

The question is more what is the price where everyone is happy. Before the pandemic broke out, we had settled into a $50 to $70 range, and if that is the target, then we should probably be looking to late 2020, early 2021. What we’re seeing right now, which has helped support the prices, is a strong speculative interest built up, especially in the US crude market from speculators. And we also saw that massive amount of retail investment in the US oil fund, which also helped drive demand for futures contracts, some of these movements will obviously always be there. That means the market can overshoot and we may overshoot sooner than I expect. But I think that ultimately fundamentals have to prevail and that will dictate the overall direction. Assuming that $50 to $70 is the range that everyone can can accept, we need to move closer to 2021, and perhaps on the other side of it.

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