Q&A: Trafigura chief economist Saad Rahim

Trading firm Trafigura's chief economist Saad Rahim spoke to Argus' Konstantin Rozhnov about oil demand prospects and Trafigura's multi-dimensional approach to thriving in the energy transition.

Have we seen peak oil demand? If not, when do you expect it to happen?

I do not think we are at peak oil demand yet. And I do not think there will be a peak per se, but instead we will get to a plateau for a bit, before we start to come off. We have had a very large hit to demand compared with 2019. But a lot of the growth in oil demand is still yet to come from places that are still seeing some big structural trends — China, India, southeast Asia, the Middle East, Brazil, Latin America, Africa. Incomes are rising there, the population is growing, demographic changes are taking place and so on.

These kind of changes tend to bring with them significant oil demand increases. And as rapidly as electric vehicles (EVs) have started to take share in China, Europe and the US, in many places of the world you do not have the reliable infrastructure to really have EVs. In the US, we are starting to see a mass exodus of people from cities to suburbs, to other states where people need a larger house, they go and buy a car or two to move around instead of using public transport. So it will take oil demand some time to recover, but there are a lot of structural trends in place that will still see us move higher in terms of consumption. But I think sometime over the next decade you are likely to see it plateau.

What are your expectations for oil demand in 2021?

You have already seen a strong recovery in many places — certainly in China, but also in Europe and Japan. The US is lagging in some parts, but we can see some stronger momentum. India has taken a major hit, but the momentum there is also looking strong. This is before you really have the effect of another round of stimulus policies out of Europe and potentially the US. And this is before you have the proper roll-out of the Covid-19 vaccines. Once the roll-out happens — let us say, by midsummer — it will definitely be a large part of what we see as a very strong demand growth next year, even if it is a long way towards recovery.

On the flip side, in terms of US oil production, do we see rigs being deployed at levels that allow you to really grow production rather than just slow the decline? I think we are some way away from that, probably not until mid-2021 onward. And Opec is bringing some supply back in January, but it is not flooding the market. The Libyan volumes have come on very quickly, so they are not really going to add many more barrels there. And the market has absorbed those volumes, meaning that demand is already looking much healthier. And we feel like the floating storage has come down very rapidly, while onshore stocks are going back to normal ranges, albeit the very top of those ranges. With all the factors taken into consideration, I think we are looking at a much healthier market than we think.

Where do you see oil prices at the end of next year?

We are already at $50/bl. Given the trends I have outlined, as long as the vaccine [for coronavirus] comes through in the way that we think it does, you should be looking at something north of $55/bl and maybe even as high as $60/bl.

Are the new national oil company trading groups a big competitive threat to independent trading firms?

It actually increases liquidity, price discovery, arbitrage opportunities and other components of a well-functioning market. So, we look at it as a positive development. And even with them being around for a bit, we still recorded our best year ever. And we already trade with these companies to quite a big degree.

This year has produced very strong results for the leading trading firms, including Trafigura's record performance in its 27-year history. What lies ahead in the short term?

It seems very unlikely that we will again see negative oil prices, as we did in the second quarter. Now that we know that these things can happen, people are looking for that and will not be taken by surprise. What we are seeing more and more is that in a world of increased volatility and increased disconnect, it is our job to address this disconnect in the market. This year we have seen the biggest disconnect and dislocation in history. Will we see those again? It is unlikely, but what we have seen is there is still a lot of volatility in the market. We see very healthy markets for all our core trading businesses.

How can a company like Trafigura square environmental pressures with its continuing presence in more polluting, less climate-friendly markets?

We have launched a third pillar of our business, around renewables and power, recognising the shift taking place. We are investing significant resources into building it into one of the core pillars of the business. And to me, this is a commodity transition in addition to the energy transition. What you need to make the energy transition happen is metals. While the world can get to a plateau oil demand over the next decade, well before you get there you will need significant amounts of copper, nickel, cobalt. For example, an EV requires four to five times as much copper as a traditional internal combustion engine.

For us, there are multiple moving pieces of the energy transition. The renewable side — we are involved in that. The metals side — we are very heavily involved in that. And there will still be the need for oil, and we are in that as well. This year, Trafigura has set ambitious but realistic targets to curb greenhouse gas emissions from its own operations in the next three years and is setting out a path to reduce emissions indirectly attributable to its activities over time.

Is it likely that Trafigura will be trading lower amounts of oil by 2024-25, while its power and renewables business will become the key revenue generator?

We have been growing our oil business for 27 years. It would be interesting to see if renewables can grow that quickly. But given some of the growth rates, you never say never. Speaking of volumes, we have never had a volumes target. Our biggest thing is we do not want to ever chase empty barrels. We want to trade the most profitable barrels and make sure we hit our margin. If we are still doing it and if it is 3mn b/d in those four to five years, then it is probably what the market says.

But we are not going to set specific targets in terms of volumes. And we are not doing renewables because we should be doing them. It is at the end of the day a material contributor to the bottom line. And to me a world where the renewables business is contributing that much to our portfolio is a very interesting development, because it does mean that our metals business is also probably growing very rapidly. But we still expect oil to remain the key revenue generator in the next four to five years.

Saad Rahim will be one of the speakers at the Argus Crude Live virtual conference taking place Jan. 26-28, 2021. For full details of the conference program and how to register to attend, please visit our event page .

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