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May 11, 2013, 02.17 PM IST | Source: CNBC-TV18

Oil inventories at 82-yr high; $108/bbl upside cap: Expert

The stimulus is not translating into demand for crude or we are just producing too much of it in lieu of some unforeseen concern that we might have in the Middle East.

Jonathan Barratt

CEO, barrattsbulletin.com

More about the Expert...

Jonathan Barratt, Barrattsbulletin.com believes oil is stuck in a range for now, with USD 108 servicing as a resistance on the upside.  

He says the inventory level for crude has hit 82-year highs. “The stimulus is not translating into demand for crude or we are just producing too much of it in lieu of some unforeseen concern that we might have in the Middle East. The strategy is being employed by the US to keep those inventory levels,” he says.

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Yesterday again we saw crude prices falling quite a bit especially Brent has fallen from recent high of US 106 to sub USD 104 per barrel. Are you sensing that Brent is in for long haul in terms of decline or would you say that current levels may represent a good buying opportunity?

A: We are still stuck in a bit of a range both for Brent and crude. One of the big issues that we continue to have is the surplus - the fact that we get these inventory bills week on week inhibits the market from trying to push through the top side.

When I look at the areas of resistance, it’s USD 108 per barrel and when I look at the West Texas Intermediate (WTI) crude its USD 98.50 per barrel. It just hasn’t got the ability for it to push higher and that is mainly as a result of the high inventories that we are currently holding.

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Q: What do you make of a slightly longer term trend because what seems to happen is that crude comes to a kind of a support say at USD 100 and try’s to get back to USD 104 a firm ceiling there. However if you look at the trajectory over the last six months and see the trajectory from say from USD 120, every time the decline happens - the bounce back is only a third of the decline and it is a step wise fall. So, can we see therefore more of this step wise downward correction coming?

A: I think so. One of the main differing points that the market has got to focus on is that the inventory levels in the states it at 82 year highs. That does tell us that the stimulus is not translating into demand for crude or we are just producing too much of it in lieu of some unforeseen concern that we might have in the Middle East. I do think that is a strategy which is being employed by the US to keep those inventory levels.

I feel that crude at around these levels is very expensive. Given the economics that we are currently seeing, given the fact that the economies are trying to pull out of this slowdown, oil really should be a lot lower than where it is at the moment. In my mind unless we get some Middle Eastern concern oil prices are too expensive at this level.

Q: The other issue which concerns India in particular is the spread between Brent and WTI which is now down to two year lows. Are there any data points suggesting narrowing or expanding of the spread - what kind of spread moves can you predict?

A: When I look at the spread, I feel at the moment that we are at fair value for it. I would actually start to see the spread starting to widen a little bit more.

I do think that some of the issues will see Brent perhaps going a little bit better bid, some of those issue in Europe at the moment. We did get some very strong German industrial production numbers last week and as a result of that Brent, because of the natural supply issues might go better bid over WTI.

Remember with the WTI, we are just reducing the stocks that we have had as cushion and as a result of that WTI is soft. However, at the end of the day it will Brent that will be the cause for the spread to widen again.

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