Expert view: 3 things that's keeping crude on the boil

Published on Thu, Apr 07, 2011 at 12:38   |  Updated at Thu, Apr 07, 2011 at 16:42   |  Source : CNBC-TV18

n an interview with CNBC-TV18, Jonathan Barratt, MD of Commodity Broking Services, spoke about his reading of the commodity universe and his outlook. 

Below is a verbatim transcript of the interview. Also watch the accompanying video.

Q: The run in crude seems unrelenting. Do you think USD 120 a barrel is here to stay?

A: It has been very interesting. We have had those moments where we felt that crude will actually stop continuing to move higher. But I get the feeling that people are buying crude purely on expectations that the Gulf concerns will spread and purely on expectations the global growth is with us.

So at the moment it certainly feels that it wants to continue to go higher — Brent is still with us. West Texas is an interesting space. But, yes, I feel that the markets expectations and our expectations follow that is that the crude prices will in fact continue to ride higher.

Q: So you would say if you had to choose, you would say USD 130 a barrel next, rather than a move down to USD 110 for Brent?

A: I would love to see a move to USD 110 a barrel. I would think at the moment just why it looks it certainly feels that it is just unrelenting. The consequences of moving higher, as we know, are across the board in terms of economic growth.

But when it really goes through I see really there are two markets: what has happened in the Brent market also in the Tapis market in Singapore what has happened in West Texas.

To me that’s a big difference, there is a big disconnect in the crude market at the moment. That to me is a real concern because Brent in itself is the one people are buying and the spread continues to blow out.

Therefore, they must be factoring expectation of higher prices. I would like to see it lower but I think the fear is that it still looks relatively strong.

Q: How much of this spike to nearly USD 122 a barrel is because of the geo-political risk premium and how much of it is fueled by liquidity? Over the last couple of weeks we have seen a lot of liquidity flowing back into emerging markets into commodities. So which is it — is it hat liquidity which has spiked it up or it is the geo-politics of it?

A: I think it is the geo-political picture. Remember when crude spike to USD 140 a barrel a lot of us had this managed expectations that USD 100 a barrel was very expensive — USD 100-110 a barrel — that is the West Texas intermediary and the markets just continue to rally through that even though we knew that was overpriced.

But it was these expectations that kept the market upbeat. So I feel at the moment the market is running on the back of expectations — expectations that concerns in the Gulf will continue for the foreseeable future and in fact we can actually say it spread.

I also feel that there are some economic arguments at the moment, which is coming into the fray, suggesting that we are starting to pull out and get some solid growth and some solid numbers. The crude market is always in that precarious balance between supply and demand. I sort of get this sense or feeling that people are buying crude is a bit of a hedge. It has reached that stage where not only the investors are in on expectations but also the hedges are now pilled into the market.

So that is why I feel it is a mixture of geo-political, investment and also hedging that’s making this market going higher.

Q: A lot of equity markets are tending to read the recent run on crude as a window of madness where it actually goes completely beyond target and then retraces. Would you say that needs to see a rethink? Over the medium-term, what kind of normal crude levels do you think the equity market will have to live with?

A: I would like to see that because OPEC and the world would actually acknowledge that higher crude prices do nobody any good. At the moment, they have to be at a very precarious balance — a very good balance. I would like to say in our yearly forecast for crude we actually suggested that USD 85 to USD 90 per barrel is realistic for this stage in our global economic growth.

As we move into Q3 and to the extent like Q3 or early Q4, as stimulus packages start to build the price of crude should naturally gravitate higher. As we have the curve ball with the Middle-East, we got to revisit this. We got to realistically say perhaps prices are here to stay for the foreseeable future.

If we do get a dip back to USD 100-110 basis Brent back to USD 95 or even USD 100 West Texas, then I would say that’s still a positive opportunity for hedgers and investors to come back into the market.

Q: But you would be surprised to see a retracement beyond that USD 100-110 level that you alluded to?

A: Yes, at this stage that is the case. The only caveat that we got to be focused on is what is really happened in China. We got the March CPI data coming out next Friday and the markets going to be keenly watching as to how that will come out.

We already know that they have lifted rates in China. We know we are moving rates in India as well. So when you look at these two big consumers, you have to start to think when their economies will start to come off the boil; when will they start to consolidate.

Once we got those signs of consolidation, I think that is when we will get to a bit of a turn around, that is, in the price or more of a trend in price to the lower end of the range.

But we have revised ourselves up, revised our forecast for the dip a little bit higher. I think USD 100-110 at the moment is where we would like to see some form of retracement.