Iran's impact on crude price remains a concern: Argus Media

Excerpts from Markets Midday on CNBC-TV18 Watch the full show »

Jim Nicholson, vice president-Asia at Argus Media tells CNBC-TV18 that he is concerned about the issues in Iran impacting crude prices. "The problem in Straits of Hormuz is a matter of worry for the crude market even as global supply concerns in Iran are prevalent," he says. Around 16 million barrels a day of oil flows through the Straits.

As far as India is concerned, Nicholson believes that we are on a pedestral against other nations. "When the EU ban kicks in later this summer, the Iranians will be looking for other markets for their crude and India is clearly well positioned to take advantage of that," he says.

Nicholson says that WTI crude has been weaker than Brent crude. "In fact, WTI crude fundamentals continue to be bearish," he says. 

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: We have seen this upward thrust coming in crude prices partly because of an extra cold winter and these geopolitical risks. Where is the resistance? Is USD 117 big enough or that will get even worse?

A: Well, it depends what happens on the supply side. You are calling it right. It's been a cold winter that's disrupted loadings in the North Sea. That's what is keeping Brent high. It's interesting to compare Brent with WTI. WTI has been quite depressed because of extra Canadian crude production, higher domestic production in the United States and transport bottlenecks. There is a growing gap again; we are seeing the WTI weakening and we saw that for much of last year. You have got also of course the concerns about Iran and how that's going to play out.

What we have seen is actually Asia picking up a lot of the excess crude supply. Demand for crude oil and refined products in Asia remains very strong. I think with the continued nuclear outages in Japan, we are going to see Japan continuing to buy crude oil for direct burning in power stations, and that's going to continue to support the market. What we don't know about is how the supply situation is going to develop.

Q: For countries like India where inherently there are bearish urges because the country is such a large crude importer, is there any hope at all? Is this premium justified because these are still supply fears, they are not realities? Do you expect that crude bounces off or retracts from these USD 117 levels or are the chances that they are going to remain at stable but elevated levels?

A: The phase is justified.Let's remember 16 million barrels a day of oil flows through the Straits of Hormuz and that's equivalent to several times China's consumption, never mind India. But we also heard just recently the Indian Finance Minister saying that India has no intention of following an EU ban on Iranian imports. So when the EU ban kicks in later this summer, the Iranians will be looking for other markets for their crude and India is clearly well positioned to take advantage of that.

Q: WTI inched higher yesterday despite having a bearish inventory report. What would you make of that?

A: It's hard to say. I think the fundamentals for WTI remain very bearish. There is still pipeline congestion getting the crude to the Gulf coast refineries and we are seeing increased Canadian crude production as well which will struggle to get anywhere further than the American mid-continent; that one is probably just a blip. But global supply, we have got concerns around Iran, we have got the geopolitical tension.... Demand remains very high. The bigger long-term cap is what's going to happen with the economy. We still see the Greek debt issues unresolved, talks continuing today. That's going to be a major concern.

Q: So what's the range that you would forecast for Brent crude, perhaps in the medium-term and even for the entire year?

A: No, I am still uncertain at the moment. I am not going to make any forecast today.

Q: The other thing that appears to be working in favor of all risk assets is this huge semi-quantitative easing that the ECB has resorted to - 489 billion euro on December 8 and the potential 1 trillion Euros that might come by the end of this month. Broadly, would you say that the average for this quarter is definitely likely to be several dollars higher than the average for last quarter?

A: It's clear that because of the geopolitical tension that we talked about and the issue around Iran and also there is continuing concerns about Syria and what is Israel's reaction going to be... there is a lot going on in the Middle East which is a key oil producing region, that is going to sustain the risk premium if you want to call it that. That's going to keep things tight. However all this quantitative easing that you mentioned just reflects a weakness in the underlying European economies. European manufacturing output, European demand for oil is extremely weak. We are seeing some tightness because of the cold weather and that's driven natural gas prices higher.

However, if you are looking at the medium-term, the global economic outlook is particularly weak. What's sustaining in the short-term is the geopolitical tension and continuing demand from Asia.

I think another fear is that Chinese economy is slowing down, but from all the data that we have seen, fears of hard landing seems to be easing. So it should be a softer landing for the Chinese economy.