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Why Trafigura Just Set Its Short-Term Price Target For Oil At $50

Gulf Coast tanker

Crude oil could decline to $50 a barrel under the double weight of geopolitical concerns and rising production in the United States. That’s according to the co-head of global oil trading at Trafigura, who spoke to Bloomberg.

“I can see us drifting toward $50 in the short term, but I think the medium to long term price is $70 to $75,” Ben Luckock said, adding “We don’t think the current level of OPEC cuts and compliance is actually enough to make oil go higher.”

It seems OPEC doesn’t think the current cuts are deep enough, either. That’s saying a lot because the current cuts are actually deeper than OPEC+ agreed them to be in December, mainly because of the continued drop in Venezuelan production. In July, for example, OPEC said its compliance rate with the cuts had reached 159 percent. Judging by price movements, even this has proven insufficient to calm global economic growth fears amid the U.S.-China trade war and oversupply worries caused by the relentless rise in U.S. shale output.

There’s more bad news for OPEC, too. Bloomberg reports Sanford C. Bernstein & Co. have estimated that the cartel and its partners would need to deepen the cuts by as much as 1 million bpd next year to keep Brent around the $60 mark as U.S. production continues to grow.

Yet according to Trafigura’s Luckock, falling prices would take care of that: the lower price at which oil trades, the less money U.S. shale drillers have to put into new production. So when the price falls, they would curb spending and production growth will slow down. There have already been calls for that from shareholders and from Continental Resources’ Harold Hamm, who a couple of years ago warned his peers that they are drilling themselves into oblivion.

OPEC+ is meeting later this week to discuss the market situation.

By Irina Slav for Oilprice.com

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