Oil prices may be near peak levels: FEER

Q: What is your sense of what is going on with geopolitics, the last leg of the spike came in from hostilities or expectations between Iran and Israel? How do you think that will pan out in the next few months?

A: There are a lot of uncertainties about whether there will actually be conflicts. The markets are extremely uncertain in terms of a broad number of factors. Unfortunately, oil resources seem to be a curse politically and in many countries it has led to instability. We are looking at so many different things coming together at the moment. It is a perfect storm. There is high demand from fast growing economies in East Asia. We might be approaching a peak in the oil prices. To some extent, the markets always overshoot when you have circumstances like this. It probably has already overshot but we will not know the extent until it all unravels.

Q: So the hopes of crude cooling down in the foreseeable future are merely based on technicals.  The fundamentals argument that crude might have overshot from a technical point of view and therefore maybe overbought and should correct, cannot be used to justify significantly lower prices- is that what you are saying?

 A: It is definitely overshot on fundamentals. There are more people coming into the markets with the expectation of rising crude prices. At some point everybody who has that kind of expectations is already coming to market that has peaked. It is just a classic market psychology but even though oil companies, who obviously watch the supply-demand and the Nymex very closely are mystified by the current price level. So, at some point it has got to come down. You could still have more shocks from something like a conflict over Iran and that could send it still higher. So it is a very dangerous path to take at the moment.

Q: Are there lots of those potential triggers lurking there because every fortnight something new seems to crop up when it is not Iran it is a Brazilian strike, when it is not that, it is some inventory data or the fear of hurricanes, do you see enough of those triggers lying around in the system which could lead to an addition of spikes?

A: There still are a few left. But the good news is that the oil price has wrecked the fiscal situation in so many fast growing Asian countries that they had to raise the prices to consumers and that encourages a certain amount of conservation and cut back in use. When China raised its prices earlier than expected and more than was expected, it had a very good impact on bringing down their oil price. High prices are a problem that creates its own solution. It causes consumers to cut back, businesses to conserve and encourages innovation and new production. So if we have prices at such high levels for long enough we will start to see some of those things start to filter into the market and that I think will bring the prices down.