Apr 13, 2011, 11.15 AM IST | Source: CNBC-TV18

Cruise cautiously on crude; geopolitical issues spell worry

Alastair Newton of Nomura International, Jonathan Barratt managing director of Commodity Broking Services and Rajini Panicker of MF Global Commodities discuss where might the crude go from here and how do you go about investing in crude.

Cruise cautiously on crude; geopolitical issues spell worry

From being a non entity in terms of commodity last year, it is one asset class that has come roaring back and has everything working for it, though ironically against for many other markets. Alastair Newton of Nomura International, Jonathan Barratt managing director of Commodity Broking Services and Rajini Panicker of MF Global Commodities discuss where might the crude go from here and how do you go about investing in crude.

Below is a verbatim transcript of the discussion. Also watch the accompanying video.

Q: Crude is so much about geopolitical issues, how do you define or describe the situation in the Middle-East North America (MENA) region right now. What kind of impact does it have on crude prices?

Newton: Since, we saw a turmoil move into Libya; it continues to pose a direct threat to oil outputs. The markets have priced-in for the complete loss of oil output from Libya, which is more or less where things stand today, offset to an extent by the additional million barrels a day which Saudi Arabia, Kuwait, Abu Dabi and Nigeria will be pumping between them, by about the end of first week of April. 

Now having got to this point where we have seen oil being fairly static, within that range, there will be volatility still between those two prices. I would add that as far as we can tell, there is no additional clear and present danger to oil or gas output anywhere else in the MENA region.

Q: What would you line out as the important cues to which crude prices react and move to?

Barratt: Crude, generally, reacts to geopolitical concerns, particularly with what is happening in the Gulf at the moment. Also, it reacts to economic concerns particularly in US and also in China — the number 1, number 2 consumers. It reacts to how the US dollar trades, so, generally because oil is priced in US dollars, if US dollar is weak or is it firm then it will help to dictate the price of oil.

Since we get 40% of the oil from the Middle East, it is a critical factor. General economics, supply and demand and the value of US dollar are the three main things that people actually focus on.

Q: On supply and demand, how easy is it to map crude and how that dynamic works out because it is very transient you work on weekly inventories for crude and then markets react to it, it is not so much about long-term call, its usually more short-term?

Barratt: It is usually more short-term. We do focus on the weekly data because we like to set a bit of a trend as to see whether or not we are seeing inventory builds or inventory draws. The market looks at those as a bit of guide but more importantly the market looks at general economics — they look for how the unemployment data treats the market, whether or not employment around the world is picking up, whether or not employment is coming off.
We also tend to look at manufacturing data and industrial production. So, there really is a general sense of economics that we get a bit of a feel from the fundamental side of it to see whether or not that consumption will actually be in the market. It should actually portray into how the inventory has actually behaved because we take the US as more of a sample space as to what is actually happening.

The other important thing is how the market reacts to this data and then again how a lot of that hot money moves, also, how that hot money also reacts because we find there is lot of investment from a lot of those fund around the world. Also, when they see this trend developing they also help to exaggerate the price movements, hence, when you look at it that inventories, economics and that hot money in my mind are the ones that we will focus to try and track to see where that trend for crude will go.

Q: How would you gauge or rate the supply demand issue or situation right now because that has actually been the primary concern for people watching Crude. Do we have a huge supply demand mismatch going here?

Panicker: Currently, it is a tight supply situation as highlighted by Jonathan, we have OPEC that produces close to 40% of the global crude oil production and that’s been under a lot of trouble. Whether it is Libya that produces about 1.3 million barrels, Algeria which again is around the same ratio, we have the major producing countries under a lot of supply constraint. The global supply for crude is around 88 million barrels but demand on the other hand is about 89.1 million barrels. Hence, it puts the global supply and demand into a supply a deficit of about 1..13 million barrels and this the tightest that we have seen in a long span.

Q: Do you think crude is about as fundamental a move as any other commodity?

Barratt: Fundamentally, it is driven but there are lots of technical traders as well and those technical traders will also add to the fray, in terms of the volatility and the volume. However, having these speculative trades with hot money moving creates good liquidity. It is important that you have liquidity when you trade in the markets. This hot money and this speculative money that trades into crude oil, actually is helping the market to be able to hedge when they need to and also to put hedges on, take hedges off. Hence, hot money when it moves does help but the only concern that we do have is that it exaggerates the actual trading in that particular commodity. It is a concern that we have because in some instances and in some commodities, some of these hedge funds have positions which are just far too large and that they could actually dictate the price of that particular commodity. However, for oil it is a good commodity where you do get volume, you get a lot of players but I don’t think it’s too much of a problem, other than the price could be exaggerated. Therefore, in a nutshell it is not too problematic for crude because it is a deep and liquid market.

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