Global Oil Cuts Seen Falling Short and Crashing Prices, ING Says

(Bloomberg) -- Oil is set to tumble back toward $20 a barrel as global producers will likely fall short of targeted cuts this week, leaving a supply overhang that will threaten to overwhelm global storage, according to ING Groep (AS:INGA) NV.

Oil giants including Saudi Arabia and Russia are likely only going to be able to cobble together a global agreement to curb 6 million to 7 million barrels a day of supplies, said Warren Patterson, ING’s head of commodities strategy. That’s more than triple what OPEC+ was cutting at the start of this year but is short of the 10 million barrels a day or more that U.S. President Donald Trump proposed last week.

It’s also well shy of the loss in demand of about 15 million barrels a day in the second quarter caused by government lockdowns to stop the spread of the virus, Patterson said. Brent crude, which has already plunged 50% this year, will crater further as storage is maxed out.

“I’ve been looking at commodity markets now for a little over 10 years and I’ve never seen anything like this,” said Singapore-based Patterson in a telephone interview. “The scale of demand destruction that we’ve seen in the market is just shocking.”

ING, the Amsterdam-based bank that finances commodities across the value chain, sees Brent crude averaging $20 a barrel in the second quarter before rebounding to $45 in the fourth quarter. Futures traded at $33.34 on Thursday.

Patterson doesn’t think the U.S. will be given a direct mandate to cut a specific volume because of its antitrust laws, but the country will still contribute output declines as drillers halt activity because of low prices. Russia wants the U.S. to do more than an organic drop in production, but will ultimately accept it as part of a larger agreement, he said.

ING sees Saudi Arabia cutting 3 million barrels a day and Russia 1.6 million. Other OPEC members and countries like Canada will contribute enough cuts to get to 6 million to 7 million barrels a day, but Patterson said he doesn’t see a way they can add enough to get to 10 million.

Top producers are set to meet on Thursday, followed by a meeting of G-20 energy ministers the following day.

Amid the gloominess in markets, Patterson remains constructive on precious metals, with gold seen as having the most upside across the commodities complex in the second quarter. Prices are expected to average at $1,700 an ounce during this period and could even test the previous record of $1,921.17 seen in 2011 in the next two to three months, although it’s unlikely to remain at that level, he said.

“We have also seen quite a bit of increased volatility in gold prices over the last month or so, but I don’t think that diminishes its appeal as a safe-haven asset,” said Patterson. “Given the level of uncertainty that we’re currently experiencing and also the fact that if you look around the globe, there’s basically not a central bank which is not easing -- that all sort of has quite supportive fundamentals for gold.”

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Gold has been on a tear, trading near the highest level in more than seven years, as investors spooked by coronavirus-related market meltdowns and economic angst clamor for the traditional haven. Holdings in bullion-backed exchange-traded funds are at the highest ever, and prospects for the precious metal have also been supported by global stimulus measures aimed at shoring up growth, including the Federal Reserve’s unlimited quantitative-easing program. Spot gold traded at $1,648 an ounce on Thursday and is up almost 9% this year.

Patterson also commented on industrial metals and iron ore:

• Among the base metals, ING is most constructive on nickel due to a growing market deficit as a result of rising demand in the battery sector, and sees an average price of $13,500 a ton by the end of this year.
• Patterson is bearish on zinc, which he sees averaging at $1,880 a ton over the fourth quarter. Further downside is seen between now and then, with prices expected to drop to $1,800 as smelters maximize refined output due to attractive treatment charges.
• Iron ore is seen averaging $85 a ton in the second quarter on rising demand in China, but will trend lower to average $75 by the end of year on continued improvement of supply from major producers such as Vale SA.

©2020 Bloomberg L.P.