Oil likely to hit US$150 this year on supply shock, says veteran trader

SYDNEY • Brent oil will likely hit US$150 a barrel this year as the supply shock from the war in Ukraine coincides with resilient demand from people keen to travel after the pandemic, according to veteran commodities trader Doug King.

The world has few options to pump more crude and there is little sign that consumption is under threat, said Mr King, who runs the US$425 million (S$577 million) Merchant Commodity Fund, which returned 28 per cent in the first two months of this year.

"Jet fuel demand is going to come back, travel is going to come back," he said on Friday. "I think people have money. They're going to go spend it, so I don't see the demand destruction at these prices."

Oil was already elevated before Russia invaded Ukraine as supply struggled to keep up with the demand rebound from the Covid-19 pandemic. The ensuing financial penalties on the country, one of the biggest crude producers, and self-sanctioning by much of the industry, saw Brent - the global benchmark - flirt with US$140 a barrel early this month, although it eased back to around US$116 on Wednesday.

Supply losses due to the war in Europe are likely to dwarf any demand destruction, as people want to start travelling more as soon as they get the opportunity, according to Mr King. The floor for Brent is now about US$100, he said.

The Merchant fund returned 74 per cent last year, placing Mr King among a group of hedge fund managers, including Mr Pierre Andurand, who made large profits from the boom in raw materials last year.

The Bloomberg Commodity Spot Index is already up 26 per cent this year, with Mr King seeing a lot more opportunity in raw materials, which he said are skewed hard to the upside as supply chains in general are still "absolutely stressed".

The huge ramifications from last year's global gas crunch on other fuel sources and industries such as fertiliser and manufacturing are only likely to filter down over the next six to 12 months, with the war making the situation "far more explosive", he said. Exploration for new oil resources is also constrained.

"It isn't like in 2007-08, where you saw explorers everywhere, you saw the multinationals going for fields and developing this and developing that," he said, adding that environmental, social and corporate governance mandates have changed things.

"Commodity markets that don't react to price signals mean it's pretty precarious".

He added that global vegetable oil markets will see "acute supply and demand tightness" as buyers rush to balance the loss of Ukrainian sunflower oil with substitutes including rapeseed, palm and bean oil.

BLOOMBERG