Commodity check: Where is crude headed?

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Iranian issue, disruptions in Middle East continue to weigh on crude prices. Daniel Hynes, director-commodity research at Citi Investment Research has been relatively conservative on the outlook for oil, particularly over the first quarter. He expects it to trade in a relatively tight range.

According to him, high inventories may keep WTI below USD 100 per barrel.

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Crude, what is it that feeding prices? What kind of near-term targets are people talking about?

A: The continued issue around Iran and possible supply disruptions in Middle East continue to weigh particularly on the Brent price of oil. We are seeing that play out again today.

We have been relatively conservative on the outlook for oil, particularly over the first quarter and expect it to trade in a relatively tight range. But these risks, that we are seeing, such as the Iranian oil supply issue certainly have the ability to breakout of that relatively USD 10 per barrel range that we are expecting. So, if this continues to get worse then certainly the outlook for price is to spike upwards.

Q: On the downside, what would you say could be the cool off on crude? What looks like the new base for prices?

A: There seems to be building inventories around the world, particularly in the US. Clearly, Europe is a concern. The macro issues involved around there as well certainly have the ability to weigh on prices. For the moment, they are taking a bit of a backseat. But they have the ability to keep prices below USD 100 per barrel in the shorter-term. We think the market should be little bit tighter Q2 as the macroeconomic situation does stabilise. But certainly the ability to go below USD 100 per barrel is there in the very short-term.

Q: The fear, at this point, is that for commodities like crude and several others there is a bit of a bubble building being egged on by what's happened on the liquidity parameter. On any of these commodities, would you say there is a making of a mini bubble in the short-term?

A: There certainly been extra liquidity in the first part of the year. We have seen particularly industrial metals and precious metals rise as consequence. I don't think we are getting into a bubble territory just yet. The investment community was relatively short in the last part of 2011. So, this has just been a little bit of reactivation of some of the money that was sitting on the sidelines.

Certainly, if things keep going the way they are over the next few weeks then there is the possibility that they could get certainly ahead of themselves. But, for the moment, we are relatively comfortable.

Q: What do you see happening with some of the base metal, for instance, copper and the others?

A: I think copper hitting towards top of our range now. It's been one of the best performers of the year and certainly been boosted by that risk on trade. But we have seen over the past six months or so that the Chinese, in particular, have been very extrude in their buying activity and certainly restock when the prices were low and have backed out of the market, when they risen up to the levels they are now. So, for us, there could be a little bit of a lull in activity, particularly with the Chinese new year just over. Prices should start to drift down a bit. But certainly if the macro environment does improve then that will add an extra fillip. But for us we think it's fully valued at the moment

Q: How important would you say the dollar is in this entire equation? What kind of levels are you working with on the currency itself?

A: The currency has had some part towards the rally in commodities so far this year. Fx team at Citi have a point to a bit of weakness in the shorter term, but actually look to some appreciation over the medium-term. So, if we do see the dollar revert then commodities would come under pressure. We think for the medium to longer term that's going to be the case. But short-term weakness in dollar is certainly helping.