Crude prices not going to fall below $70, says XM Australia's Peter McGuire

Saudi Arabia, the world's biggest oil exporter, has pledged to slash production by a further 1 million barrels per day (bpd) from July amid concerns over slowing global energy demand. Peter McGuire, CEO, XM Australia, gives his views on oil prices and more.

Saudi Arabia pledging another million barrels cut in output after the surprise cut we saw in April. Are you surprised?

Peter McGuire: Well, good morning and greetings from Sydney. No, I'm not really surprised. And I'll tell you why. When I digest the market and what's happened over the last couple of months, there is no doubt in my mind that the Saudis, and they say it quite openly, are really after that $80 plus 85. And considering what's happened with the US dollar over the last six months from 114, for the US Dollar Index, back to the best part of 104, a 10. A big washout. And that's really impacting if you're getting paid in US dollars via crude and Petro dollars, then there's less bang for your buck. And there is no doubt that that million barrel cat is their way of trying to get a higher price.

And as the Saudi prince came out and said last week, if you're on the short side, and you're trying to play this from a speculators speculation standpoint, you're not going to like how it moves forward. I think that was the warning, you gave everyone a warning. And that I would wouldn't have liked to have been short in the last couple of hours.

Last time, we saw a surprise cut coming in, the crude prices surged to as much as $87. However, they weren't really sustainable, they came back to levels of somewhere around $72-$73. Do you think this time this output cut managed to prop up prices? Or do you think it's a demand, dwindling demand rather, that would weigh in on prices again?

Peter McGuire: Well, at that time, when that happened, I take on board as far as the calendar year, and you're just coming out of, you know, the lockdowns in China and the end of COVID. And we're talking more in that March sort of timeframe. Now, you're talking summer driving season in the states where nearly we're in June. And that's traditionally the busiest time for transport, and, of course, demand picture, and people are on holidays, and they'll be driving across the states, because we couldn't do that for a number of years. So I'm expecting more consumption. The other side of it is yes, I won't be surprised for it to hit back up to those sorts of targets. Now, it's too hard to say whether it's going to do it in the next week or two weeks. But I think the overall fundamentals are going to push it higher from here.

And you're also looking at the other side, which is the geopolitical concerns of the Taiwan situation, what's going on with Ukraine still. And I take on board, the weather outages that traditionally run from late July, early August for the hurricane season.

What is the possibility of crude going above that $90 mark? On the contrary, do you expect it to somewhere slip below that $70 mark, given the kind of slowdown in demand from top three consumers like India, European Union, as well as China?

Peter McGuire: I don't necessarily think it's going to fall below $70. If it does, then it's going to be I think, short lived. So I'm tilted to the other side, I think that there's more upside than downside risk. And that seems to be really, I think, where a lot of traders are thinking and yeah, I'll be interested to see how it all works forward over the next matter of weeks leading up into July.

Do you expect Saudi to extend the cuts beyond July now? what is the medium term outlook on crude oil? In fact, for this for the current year, where do you expect crude to settle?

Peter McGuire: Well, we're seven months out to a New Year's Eve. So that's, that's a very long timeframe. And there's a lot of water that has to pass under the bridge between now and then then. So look, I wouldn't be surprised for it to hit 90 over that window. I won't be surprised if it went higher. But I just think that there's a lot of time to really take on board and a lot of global themes that need to play out right. What's happening as far as inflation, where do we go with US dollar and of course, what happens from a geopolitical standpoint, and then you're talking about you know, seasonality demand. So yeah, I do think it's going to be higher than where we are at the moment.