Crude to cool down once MENA woes subside: FACTS Global

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In an interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy, Praveen Kumar of FACTS Global said crude prices may remain buoyant till the Libyan tensions persist.

Brent crude climbed 1.5% on Monday towards USD 116 after western forces launched a military campaign against Libya, stoking fears that violence will intensify in North Africa and the Middle East, source of more than a third of the world's oil.

However, Kumar expects prices to cool down once Middle East and North Africa (MENA) region tensions subside. "Overall, we still continue to see about USD 102-103 a barrel for 2011," he said.

According to him, OPEC will be comfortable with prices around USD 80 a barrel.

Below is the verbatim transcript of the interview with CNBC-TV18. Also watch the accompanying video.

Q: How would you sum up the situation for the last 48-72 hours? Would you say the situation just from a prices point of view has escalated?

A: The problem pretty much remains the same. There is lot of volatility in the market. Up until the last week, problem was mainly the Middle-East and North Africa crisis. Now, it is the Japan situation. The problem in the Middle East will have more of an impact on the crude prices, not so much the situation in Japan.

In another two weeks or so, the situation in Japan could more or less change in the sense that, we are seeing more of an impact in product markets rather than on crude. The demand from Japan will more on the low sulphur crude which is more for burning in the power utilities.

Japan is more important from the liquefied natural gas (LNG) side, whereas the situation in Middle East North Africa will be more important, especially with the no fly zone declared over Libya. It will be more important for the crude prices scenario.

Q: If you believe that there is that huge geo-political risk to the supply of crude, do you sense that long-term averages that analysts have laid out would be on the higher side for crude now? Does crude deserve long-term averages not just for this year but for the next year as well? What would your estimate be?

A: Right now, we are looking at Brent price of about USD 115 per barrel. When the Japan situation started, we saw a drop in crude prices. But, this was a very short-term phenomenon. Once again the prices went back to USD 115 per barrel. Today, the difference Brent and WTI is about USD 14 per barrel.

We see no reason to change our long-term scenario. Over the next month or so, as long as the crisis in Libya continues, we would see an upside to crude. Other than that, overall for the year, we still continue to see about USD 102-103 per barrel for 2011. Over the long run from a supply point of view because of the geopolitical side, we see crude prices continue to stay high.

There isn't any reason to change our numbers as such. The short-term phenomenon has been more volatile. Therefore, we see that crude prices will continue to remain in the high USD 110 per barrel sort of range.

Q: How high would you say speculative activity is especially on Brent?

A: Libya produces about 1.6 million barrel per day of crude. We have production coming out of Libya for less than USD 1 million which is less than 500,000 barrels per day. This problem will continue as long as there are tensions in the Middle East.

At the same time, Saudi Arabia is ramping up its supply. In terms of the production, there is not such a big problem and Saudi can start producing and meet these levels of crude that is stropping from Libya because of its reserve capacity. It's more on the quality side. The sort of crude Libya produces, Saudi has stepped in saying that they can produce the same kind of crude.

It's not so much on the supply point of view, but it is more on how the market and the traders are having such a busy time of the ongoing news. The crude prices staying up at high levels are more or less because of the speculative activity that is going on. For the year, I would put the price down at about USD 103 per barrel for Brent.

Q: With what kind of base? In the event of a correction in this market, would you say that the base for crude has been hiked and shouldn't go down to anything beyond USD 95 per barrel?

A: In terms of the current crude price, the Organization of the Petroleum Exporting Countries (OPEC) has said that they are comfortable with a high crude price environment of about USD 75-80 per barrel. If we look at the alternative energy scenarios, anything about USD 75-85 per barrel, they are comfortable with that as well.

In such a scenario, anything about USD 80 per barrel is a good price environment. When we see the high price of USD 115 per barrel, it is more or less led by the situation in the Middle East North Africa. If we throw Japan into the situation, then that keeps prices high up as well.

Q: What is the situation with respect to Saudi Arabia as it is the key pressure pocket? Up until now it's contained, but is there any heightened nervousness about the situation over there escalating?

A: When you look at the Middle East as a whole, you have Bahrain. If you look at a situation of Saudi and Bahrain, the demographics is very different. In Saudi, you have the average person financially very well off. There is no reason for a sort of a tension to escalate there. Whereas the situation in Bahrain, there clearly is some sort of a social disparity, which is now leading to these kind of tensions.

The Saudis are now intervening into the situation in Bahrain and are trying to control the situation there with the fear that it might escalate. To be absolutely honest, we don't see this kind of a situation escalating into Saudi.

If such a situation were to spill over to the Saudi, then there are chances for the crude prices to go into a very high level. Right now, we don't see that kind of a risk existing.