The global oil market is vulnerable to dramatic price spikes because it’s failing to prepare for sudden snap-backs in demand, according to the world’s biggest commodity trader.
The loosening of China’s Covid Zero policy could result in a sharp rebound in oil consumption, prompting a rush for supplies that the market won’t be able to meet, said Saad Rahim, chief economist at Trafigura Group.
“We’re potentially moving from a world of commodity cycles to a world of commodity spikes because of the under-investment that has taken place in the last decade,” he said in an interview on the sidelines of the APPEC 2022 conference hosted by S&P Global Commodity Insights in Singapore.
Global benchmark Brent crude has fallen around 40% from a high in early March on a combination of monetary tightening, recession fears and a surge in the dollar. Saudi Arabia and others, however, have complained that extreme volatility and a lack of liquidity mean the futures market is increasingly disconnected from fundamentals.
If, for example, the world needed an additional 2 to 3 million barrels a day of oil supply due to recoveries in China or the US, producers would struggle to find those supplies as there’s very little spare capacity, Rahim said.
“My view is that people who were not investing at $100 to $120 a barrel this year aren’t going to be investing when it’s $70 to $90.”
Other events that could prompt a sudden rebound in demand include the Federal Reserve pausing tightening, a post-winter recovery in Europe and the US summer driving season next year, he said.