David Lennox, Fat Prophets expects near-term considerable weakness in oil prices unless there is curb on the oversupply of oil from either the oil producing countries or companies.
There is no floor or support levels for crude and it could drift even below USD 40 per barrel as it has done so a few times in the last six months, says Lennox in an interview to CNBC-TV18.
The oversupply headwinds will continue to weigh on oil prices but the only factor that may push oil prices up or bring some turnaround could be the Fed rate hike, which may prove that US economy is doing well, he adds.
Below is the verbatim transcript of David Lennox's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: What is your sense now, where does it stop, have we already hit a near-term bottom in Brent at USD 43 per barrel or do you think it gets worse?
A: There is no doubt the market has reacted quite savagely to the in-action that we saw coming out the Organization of the Petroleum Exporting Countries (OPEC) meeting on Friday and of course oil prices as well. We do think that the headwinds that are being back in the oil prices now for some months and that is supply surplus -- it is still in place and in fact we were hoping that OPEC would take care about that but unfortunately they didn’t. So we would expect to see in the near-term considerable weakness in the oil prices going forward. Unfortunately that scenario from our view has not changed.
Sonia: What is your view going ahead from now for the next three-six months, how much lower do you think Nymex and Brent could go?
A: There is no doubt that if we don’t see any significant cuts in production from some or one of the producing countries or companies then we would expect to see the crude crisis just gradually drifting lower. The only real matter that we can see that may push prices higher is in fact the upcoming Federal Open Market Committee (FOMC) meeting where if the rates are raised that would concern that perhaps the US is certainly in a much stronger economic growth base than we expected.
We could perhaps see some turnaround in the oil prices post that meeting. However, at the moment the headwinds are all unfortunately on the surplus production and that view has not yet changed. So we would expect to see the Brent price probably trading towards close to USD 40 per barrel rather than at this point moving higher.
Latha: There are a couple of things that traders are holding on to the fact that the rig count has been coming down as well there is crude usually finding support around that USD 40 per barrel mark, you don’t think there is a technical support that is available at USD 40 per barrel for Brent? Does it plunge even USD 40 per barrel?
A: We don’t think that at this stage, there is probably a technical floor that has been built up in the Brent prices. We have seen some volatility in it and unfortunately we have seen that over a prolonged period of time drifting lower and breaking through a number of supports over the last six months. So at this point, we are thinking that there is just no chance for the Brent prices to find the support level.
The fundamentals of an oversupply still in place so that does make it difficult just for the process to find that base and then try for a period of time to form up a solid base. So at this point, we are still looking for perhaps a little further downside. Until such time that we do see some rationale action from supply side to curb production.