(Bloomberg) — Commodity trader Pierre Andurand sees a path for crude to reach $200 by the end of the year as historically tight markets struggle to ramp up production and replace lost supply from Russia.
He estimates that about 4 million barrels per day have been withdrawn from circulation as a result of the Russian invasion of Ukraine and subsequent restrictions on doing business with Putin’s government. While freeing oil from strategic petroleum reserves could increase supply in the near term, it is likely that the energy industry will not be able to increase capacity to fully compensate for lost barrels.
Russian oil will likely be out of the market even if Putin agrees to some sort of impending ceasefire with Ukraine, the founder of Andurand Capital Management LLP said on the latest episode of the Odd Lots podcast. Meanwhile, shale producers and some OPEC members will also struggle to ramp up production after years of underinvestment.
“I don’t think they will suddenly stop fighting, the oil is coming back. It will not be the case. The oil will be gone forever,” he said. “We will have to live with higher prices to keep demand down, to treat it a bit more like a luxury product and also to accelerate the energy transition.”
A tighter supply of commodities will “actually limit the kind of economic goals we can achieve,” he said. “A lot of people just assume, you know, in their economic model that we can have as many goods as we want. It’s just a matter of question. But no, this time it will be supply restriction.”
Andurand has made a name for himself by successfully trading commodities at particularly volatile times, raising riches for himself and his investors. For example, he shut down oil as prices plunged dramatically into negative territory in April 2020, with supply overwhelming demand, while traders ran out of physical storage for crude.
Now he sees that the world may be facing the opposite situation, with supply so tight that some market participants may struggle to supply physical crude even as spot prices rise.
One of the questions that regularly arise regarding oil is the extent to which ESG-tilted policy decisions by the current US administration are limiting new production of oil. However, for Andurand this is a secondary factor behind the more simple financial and physical considerations. He cites two primary factors for a muted domestic supply.
In a recent viral interview with Bloomberg TV, the CEO of Pioneer Natural Resources Co. that U.S. shale cannot grow much more no matter what the White House wants, partly because of physical constraints — including labor — but also because of investor demands.
And as Andurand points out, the potential supply is limited in places other than the US as well. Some OPEC+ members, especially in Africa, are struggling to meet their permitted production quotas due to years of deteriorating infrastructure
Ultimately, it’s the $200 level, he says, where we start to have actual demand destruction and a possible market balance.
Andurand himself sees a process of acclimating the economy to increasing numbers.
You can listen to the full podcast here.
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