Moneycontrol
Sep 10, 2015 02:28 PM IST | Source: CNBC-TV18

Brent price may fall; safeguard duty 'right': Fat Prophets

Calling government’s decision to implement safegaurd duty ‘right’, David Lennox, Analyst, Fat Prophets says it is needed to protect domestic market.

Brent crude prices may continue to fall, considering Fed’s meeting in September to review interest rates, says David Lennox, Analyst, Fat Prophets.

With the release of Energy Information Administration’s (EIA) data suggesting lower US oil production numbers for 2016, risks remain for the downside for the crude prices, he adds

Calling government’s decision to implement safegaurd duty as a ‘right’ move, he says it is needed to protect the domestic market. 

"However, of course steel has to be manufactured and whether in China or in India, there will be a requirement for iron ore. ..... So perhaps some of your domestic suppliers are going to get a little bit of a kick up in terms of supplying into increased domestic steel production potential," he says.

On gold, he says post a Fed rate hike, US dollar will strengthen and in turn put more pressure on the gold prices.

Below is the transcript of David Lennox's interview with Ekta Batra & Anuj Singhal on CNBC-TV18.

Anuj: Do you sense Brent crude and Nymex crude going back to the previous lows and hitting further lows from here or do you think most of the price damage is done?

A: We certainly think that the Brent price and the crude price could continue to drift lower over the next few days. Primarily we think however as the market starts to draw closer to the upcoming September Fed meeting, we may see a bit of a quiet time in trading while we wait to see what the Fed is going to do.

However, just recently we saw the EIA come out and release lower production numbers for 2016 in the US and round about 8.8 million bbl but they also lowered their prices for 2016.

Therefore, we would suggest that at the moment the risk does remain on the downside for the crude prices.

Ekta: You views in steel prices. This comes at a time where there is safeguard duty which India is proposing at this point in time to possibly make domestic steel more competitive with the imports that we are seeing. What is your sense in terms of steel prices considering the likes of Rio Tinto and BHP Billiton have reduced their China steel forecast for the next couple of years as well?

A: The response to the safeguard duty has come about because India did see a significant inflow of relatively cheap Chinese steel coming across the border.

I think your government has done the right thing by imposing that duty. There will be an impact through China. Chinese steel will have to now find home somewhere else.

So we expect that that could put further pressure on what we have already seen over the last 12 months on oil price.

However, of course steel has to be manufactured and whether in China or in India, there will be a requirement for iron ore.

However, Australian producers were not big suppliers to the Indian market. So perhaps some of your domestic suppliers are going to get a little bit of a kick up in terms of supplying into increased domestic steel production potential.

Anuj: So far gold hasn't acted as the classical safe haven or the classical defensive buy. Do you expect that to change over the next couple of months or so?

A: We thought that we would see the gold price rally post that meeting as the Fed was likely to take no action - that's now certainly well factored into the market that September is not going to see a rate rise from the US Fed.

So we think in the months ahead if that's the case then uncertainty is going to start falling on the following months in terms of when that rate rise will happen and once that does happen, the US dollar will react in an upward direction and that will continue to put pressure on gold price.

So we are expecting that over the next few months if we see a rate rise in September for that uncertainty to play through the following months then that could cause gold prices unfortunate to weaken as US dollar likely to stay strong over those couple of months.

Anuj: So far gold hasn't acted as the classical safe haven or the classical defensive buy. Do you expect that to change over the next couple of months or so?

A: We thought that we would see the gold price rally post that meeting as the Fed was likely to take no action - that's now certainly well factored into the market that September is not going to see a rate rise from the US Fed.

So we think in the months ahead if that's the case then uncertainty is going to start falling on the following months in terms of when that rate rise will happen and once that does happen, the US dollar will react in an upward direction and that will continue to put pressure on gold price.

So we are expecting that over the next few months if we see a rate rise in September for that uncertainty to play through the following months then that could cause gold prices unfortunate to weaken as US dollar likely to stay strong over those couple of months.

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