Commodities trader Pierre Andurand sees a path for crude oil to get to $200 by the end of the year as historically tight markets struggle to ramp up production and replace lost supply from Russia.

He estimates some 4 million barrels per day have been taken out of circulation as a result of Russia’s invasion of Ukraine and subsequent restrictions on doing business with the Putin government. While releasing oil from strategic petroleum reserves could help boost supply in the short-term, it’s likely that the energy industry won’t be able to increase capacity to fully offset the lost barrels.

Russian oil will likely be out of the market even if Putin agrees some sort of imminent 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 boost production after years of underinvestment.

“I don't think that suddenly they stop fighting, the oil comes back. It's not going to be the case. The oil’s going to be gone for good,” he said. “We’ll have to live with higher prices to keep demand down, for it to be treated a bit more as a luxury product and also to accelerate the energy transition.”

Tighter supplies of commodities will “actually cap the type of economic goals we will be able to have,” he said. “A lot of people just assume, you know, in their economic model that we can have as much of a commodity as we want. It's just a question of demand. But no, this time it'll be supply constraint.”

Andurand has made his name from successfully trading commodities at particularly volatile moments, netting riches for himself and his investors in the process. For instance, he shorted oil as prices dramatically dipped into negative territory in April 2020 with supply overwhelming demand while traders ran out of physical storage for crude.

Now, he sees the world potentially facing the opposite situation, with supply so tight that some market participants might struggle to deliver physical crude even as spot prices soar.

“So for example, let's say during the Covid times when the demand suddenly collapsed 20% overnight, we built a lot of inventories over a short period of time. And, you know, the infrastructure of the market, you know, was not built to withstand those kind of events of losing 20% of the world's demand overnight. So the level of empty storage actually could only take one and a half months of this really low demand before all the tanks were full. And so in April 2020, when all the tanks were full, basically if there’s still some production that needs to be moved. Nobody can buy that oil and that's where prices can go negative.

And as you say, when we’re in the opposite scenario where inventories are very low and there are places in the world where a delivery of certain contracts, such as Cushing in Oklahoma for WTI, where the tanks are all empty and there's no oil in those tanks anymore. If somebody is long futures and tries to take delivery of oil at that place and that point in time, well, nobody can deliver, and then you can go to any price. So generally what happens is that's where the kind of so-called speculators are in the middle to help make the price move enough so that we're never in a situation where either the tanks are full or either the tanks are empty.

So it means, somehow it means, you know, that prices have not gone up fast enough and for long enough to either bring more extra supply or actually reduce demand before we run out of inventories. And that's where sometimes people wonder, you know what is the role of speculators? I mean, it's actually price discovery and also giving the right signals to producers and consumers in order not to run out of storage capacity or not to run out of inventories, because then prices can go anywhere...”

First « 1 2 3 » Next