The uncertainty in Europe has commodities like oil getting a breather. Oil prices fell for a fifth straight session, marking the largest five-day decline since October.
Driving this weakness in crude are also the continuous comments coming from Saudi Arabia with regards to additional supply hitting the market.
Philip Gotthelf of Equidex says there is a worldwide push towards the development of petrochemical assets which is why we are seeing some downward pressure on the markets.
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: What do you make of this weakness in crude, is it being driven by the bad news coming out of Europe or also by the continuous comments coming from Saudi Arabia with regards to additional supply hitting the market?
A: It is a combination of both but the most significant aspect of the crude market is the additional supply that is coming from sources beyond the Organization of the Petroleum Exporting Countries (OPEC). But the industry in general has been waiting for the results of drilling campaigns in places that have not made the news. For example, there is a huge push in Columbia, South America; there are drilling rigs that are even being set up in India to take advantage of horizontal drilling technologies and the conversion of shell deposits into usable energy supplies.
With this worldwide push towards the development of petrochemical assets, we are seeing some downward pressure on the markets in two ways. One, where people haven’t been looking at is the far spreads going way out to 2014-2015, which are available on the Nymex division of CME. The actual price of those barrels of crude is well under USD 90 per barrel, which suggests that if you were to buy crude into the future, the anticipation is greater supply as opposed to tighter supply.
Q: We are going to continue to see political turmoil in Europe. How is that going to play out on prices even as more supply comes on line?
A: Turmoil in Europe doesn’t lead to higher prices for crude; turmoil in the Middle East would lead to higher crude prices if the traders thought that the supplies from the Middle East were going to be curtailed. We see crude coming down even more significantly from the USD 95-96 per barrel on the Nymex market. In fact, we might even see crude dip to the October lows below USD 80 per barrel.
The reason is if you look at the inventories, they are building. The economies of Europe are weak, that means that the discretionary driving this summer is likely to be less which means that the demand for diesel fuel in Europe is likely to be less. We see crude oil inventories rising through the summer with turmoil in Europe and prices coming down.
Q: The Middle East was one of the reasons we saw crude spike a couple of months ago, but this market seems to be shrugging off any potential escalation of hostilities between Iran and Israel that was a possibility in the early part of the year and now it seems to be written off?
A: It certainly seems to be taking a backseat or a smaller position in the minds of traders compared with the amount of crude oil that has been produced in areas other than the Middle East. What we have now discovered is that supplies of oil that are coming out of Brazil for example and some supply coming out of Columbia, South America, are sufficient to make up for the deficiencies anticipated from Libya for example. Even if we had a shutdown of the Middle East, the impact of it is becoming less threatening as other sources of crude oil come to market.
The other thing is that the pipelines are being expanded out of the Caspian Sea which is not affected by Middle East tensions. Those pipelines which were formally carrying one and a half to two million barrels of oil a day are now being increased to 2.5 million barrels of oil a day. Each incremental 100,000-200,000 barrels of oil from various sources outside of the Middle East makes up for the potential deficiencies if for example Israel and Iran were to enter into some type of military activity.
Q: You said that you expected Nymex crude to trade below USD 80 per barrel, maybe even below USD 80 per barrel in the second half of this year. Do you have a view on Brent as well?
A: We see Brent coming down finally below USD 100 per barrel. Certainly, it could trade somewhere between USD 90 per barrel and USD 95 per barrel area depending upon how the economies of Europe take to the protest that were exercised by voters over this past week. If there is a significant slowdown of economic activity and discretionary driving for this summer, the demand for crude oil is going to be slack and therefore Brent is going to be impacted from a price standpoint.